SUPPLY CHAIN INVENTORY MANAGEMENT CHAPTER 9 337

is interpreting the results in making decisions, the software re- 5. Southern Markets, Inc., is considering the use of ABC
places entirely the manual calculations. analysis to focus on the most critical SKUs in its inven-
1. A part is produced in lots of 1,000 units. It is assembled tory. Currently, there are approximately 20,000 different
from 2 components worth $50 total. The value added in SKUs with a total dollar usage of $10,000,000 per year.
production (for labor and variable overhead) is $60 per a. What would you expect to be the number of SKUs and
unit, bringing total costs per completed unit to $110. The the total annual dollar usage for A items, B items and C
average lead time for the part is 6 weeks and annual de- items at Southern Markets, Inc.?
mand is 3,800 units, based on 50 business weeks per year. b. The following table provides a random sample of
a. How many units of the part are held, on average, in cycle the unit values and annual demands of eight SKUs.
inventory? What is the dollar value of this inventory? Categorize these SKUs as A, B, and C items.
b. How many units of the part are held, on average, in
pipeline inventory? What is the dollar value of this in- SKU Code Unit Value Demand (Units)
ventory? (Hint: Assume that the typical part in pipeline A104 $2.10 2,500
inventory is 50 percent completed. Thus, half the labor
and variable overhead cost has been added, bringing D205 $2.50 30
the unit cost to $80, or $50 + $60/2.)
X104 $0.85 350
2. Prince Electronics, a manufacturer of consumer elec-
tronic goods, has five distribution centers in different U404 $0.25 250
regions of the country. For one of its products, a high- L205 $4.75 20
speed modem priced at $350 per unit, the average weekly
demand at each distribution center is 75 units. Average S104 $0.02 4,000
shipment size to each distribution center is 400 units, and
X205 $0.35 1,020
average lead time for delivery is 2 weeks. Each distribu-
tion center carries 2 weeks’ supply as safety stock but L104 $4.25 50
holds no anticipation inventory.
a. On average, how many dollars of pipeline inventory 6. Yellow Press, Inc., buys paper in 1,500-pound rolls for
will be in transit to each distribution center? printing. Annual demand is 2,500 rolls. The cost per roll
is $800, and the annual holding cost is 15 percent of the
b. How much total inventory (cycle, safety, and pipeline)
cost. Each order costs $50 to process.
does Prince hold for all five distribution centers?
a. How many rolls should Yellow Press, Inc., order at a time?
3. Terminator, Inc., manufactures a motorcycle part in lots of
250 units. The raw materials cost for the part is $150, and b. What is the time between orders?
the value added in manufacturing 1 unit from its compo- 7. Babble, Inc., buys 400 blank cassette tapes per month for
nents is $300, for a total cost per completed unit of $450. use in producing foreign language courseware. The ordering
The lead time to make the part is 3 weeks, and the annual cost is $12.50. Holding cost is $0.12 per cassette per year.
demand is 4,000 units. Assume 50 working weeks per year.
a. How many tapes should Babble, Inc., order at a time?
a. How many units of the part are held, on average, as
b. What is the time between orders?
cycle inventory? What is its value?
8. At Dot Com, a large retailer of popular books, demand
b. How many units of the part are held, on average, as
is constant at 32,000 books per year. The cost of placing
pipeline inventory? What is its value?
an order to replenish stock is $10, and the annual cost of
4. Oakwood Hospital is considering using ABC analysis to holding is $4 per book. Stock is received 5 working days
classify laboratory SKUs into three categories: those that after an order has been placed. No backordering is al-
will be delivered daily from their supplier (Class A items), lowed. Assume 300 working days a year.
those that will be controlled using a continuous review
a. What is Dot Com’s optimal order quantity?
system (B items), and those that will be held in a two bin
system (C items). The following table shows the annual b. What is the optimal number of orders per year?
dollar usage for a sample of eight SKUs. Rank the SKUs, c. What is the optimal interval (in working days) between
and assign them to their appropriate category. orders?

SKU Dollar Value Annual Usage d. What is demand during the lead time?
e. What is the reorder point?
1 $0.01 1,200
f. What is the inventory position immediately after an
2 $0.03 120,000
order has been placed?
3 $0.45 100
9. Leaky Pipe, a local retailer of plumbing supplies, faces de-
4 $1.00 44,000 mand for one of its SKUs at a constant rate of 30,000 units
5 $4.50 900 per year. It costs Leaky Pipe $10 to process an order to
6 $0.90 350 replenish stock and $1 per unit per year to carry the item
in stock. Stock is received 4 working days after an order is
7 $0.30 70,000
placed. No backordering is allowed. Assume 300 working
8 $1.50 200 days a year.