Problems in Inventory Management

Operations Management II

Saurabh Chandra, IIM Indore

Q1.
An electronics and electrical wholesale/retail firm sells multiple items
ranging from small resistors to personal computers through its outlets.

One of its products, a small resistor (part # 4915028) is an inexpensive

item, which it orders from a very reliable supplier. The delivery lead
time is 2 weeks. The cost of each unit of the resistor is $0.12. Annual
demand is 60,000 units. Ordering cost is $10 per order and mainly
comprises of administrative tasks of raising the order. The inventory
carrying cost is estimated at 25% of product cost across the company.
Company maintains a policy of 99% fill rate (assume this to be the
service level for now, as we have not yet discussed fill rate).
What should be the order size for this
product?
Probability distribution of demand during the
two weeks lead time
DDLT Prob. What should be the reorder
point?
> 2400 0.5
2900 0.25
3150 0.125
3400 0.075
3600 0.05
Q1. Multiple transportation options.
Let’s consider the previous problem data and instead of $10 as the
ordering cost, now our order cost mainly comprises of transportation
(FTL). Let’s say we have two options:

1. Large truck which can carry up to 50,000 units and costs $ 500 for a
single delivery
2. Small truck which can carry up to 20,000 units and costs $ 300 for a
single delivery

What should be the order size now?

Hint: consider multiple scenarios with different trucking options.

Q2. A company needs to procure wire strippers from an external supplier. The item also
needs shrink wrapping, which the company can either outsource to the supplier itself or
do it themselves using their own machine in-house.
• Item: wire strippers (#4569802)
• Annual demand, D = 1000 units
• Taiwanese supplier:
• C = $0.70 per unit
• Additional cost for shrink wrapping = $0.40 per unit
• Packaging equipment (shrink wrap machine) – purchased in-house:
• Changeover time of an hour – valued at $40
• Per unit cost = $0.10
• Machine amortization rate = $0.30
• Assumption that wrapping in-house more expensive
• Item purchased from the supplier along with shrink wrapping as the variable cost was
same (is this assumption correct?) and setup cost was high.
Is the company policy of complete outsourcing right from cost point of view?