Exercises of inventory management

Ex 1: Company X predicts to have material demand of 7200 units for production in the next
year. The ordering cost is $400 per order and the carrying cost is $100 per unit. The company
uses EOQ model for inventory management.
a. What is the optimal ordering quantity of the company in the next year?
b. What is the minimum total cost of inventory management of the company in the next
year?
c. What is the company’s reordering (restocking) point? Suppose it takes 3 days for
input material delivery.
d. Suppose the company has safety stock of 60 units. Redo questions a, b and c.
SOLUTION

a. Q* =
√
2 × 400 ×7200
100
= 240 (units)
240
b. Carrying cost: 100 * = $12000
2
7200
Ordering cost: * 400 = $12000
240
 TC = $24000
7200
c. Reordering point: * 3 = 60 (units)
360

d. Q* = 240
Carrying cost = $12000 + 60*$100 = $18000
Ordering cost = $12000
 TC = $30000
Reordering point: 120
Ex 2: Company Y forecasts next year’s input material demand to be 1520 units. The price of
material is $75,000 per unit. The ordering cost is $2,000 per order and the carrying cost is
10% of the buying price. The company has safety stock of 50 units. How many times should
the company order materials from the supplier in the next year according to EOQ model?
SOLUTION
Carrying cost = $75000 *10% = 7500/unit

Q* =
√ 2∗D∗OC
CC
=
√
2∗2000∗1520
7500
= 28.47

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 1520
 Order per year = = 53.38 (times)
28.47
 Làm tròn lên hoặc xuống: 54 * 28.47 > 1520
53 * 28.47 = 1508 <1520 -> bù bằng safety stock
Ex 3: Benjamin Barker, Ltd. is a textile firm which uses EOQ model for inventory
management. For each order in the next year, the firm plans to purchase 3 tons of cloth from
the supplier. The ordering cost of the company in the next year is estimated to be $3,6
million. Besides, the firm will have to pay $120,000 each time they order new cloths from the
supplier. How much cloth does the firm need for the next year’s production?
SOLUTION
D
Total ordering cost: OC *
Q
Q× ordering cost
 D=
OC
3× $ 36000000
 Amount of cloth need for next year = = 90 tons
$ 120000
Ex 4: Company Z uses 4,500 units of input material each week and has to order the same
amount of input material for the next week. The carrying cost is $2,5 per unit and the
ordering cost is $1,090 per order. Is this the optimal inventory management policy for the
company (Based on EOQ model)?
SOLUTION
Q 4500
Total carrying cost = CC * = $2.5 * = $5625 (SIMILAR TO EX1,B)
2 2
Total ordering cost = $1090 * 52 = $56680
The inventory management is optimal when the total carrying cost is equal to the total
ordering cost (according to Cosy) -> This policy is not optimal
MỞ RỘNG:
CC = $2.5
OC = $1090
4500
D= * 365 =
7

Q* =
√ 2∗D∗$ 1090
$ 2.5
≠ 4500

Ex 5: At the beginning of each week, company BCG has 280 units of input material. This
amount of material is used up in 1 week. Therefore, the firm has to order new input material
from the supplier at the end of each week. The average carrying cost is $36 per unit and the
average ordering cost is $120 per order. What are the carrying cost and ordering cost of the
whole year? Should the firm increase or decrease the ordered quantity to optimize their
inventory management policy? What is the time between 2 consecutive orders in this optimal
inventory management policy?
SOLUTION

2
 280
Total CC = 36 * = $5040
2
Total OC = 120 * 52 = $6240
D = 280 * 52 =

Q* =
√ 2∗120∗14560
36
= 311.56

 Should increase the order quantity to optimize the inventory management

policy
280
Units used in 1 day = = 40 (units)
7
311.56
 The time between 2 orders in a row = = 7.78 (days)
40
Ex 6: Company PVC uses EOQ model for inventory management. The ordering cost is $300
per order and the carrying cost is $8 per unit. The optimal ordering quantity is estimated to be
$1,200 units. If the input material is delivered later than expected by one week, how much
safety stock should the company have?
SOLUTION
Q* = 1200
CC = $8
OC = $300
Because this is optimal inventory management
 Total CC = Total OC at Q* = 1200
1200 D
 8* = 300 *
2 1200
 D = 19200 (units)
 D for 1 week = 369.23 (units) (= 19200/52)
 Safety stock = 364.23 (units)
Ex 7: A business sells motorcycles. The demand for the next year is estimated to be 1,400
motorcycles. The ordering cost is $100 per order and the carrying cost is $5 per unit. The
firm applies EPQ model for inventory management. What are the optimal ordering quantity
and optimal number of orders of the company in the next year? (Note that in this case, the
ordering quantity can NOT be a decimal number). Assuming that the company has safety
stock if needed.
SOLUTION

Q* =
√ 2 ×140 0 × 100
5
= 236.64

Làm tròn số:

1 4 00
If Q = 237 -> n1 = = 5.91
237
237
 Total cost = (5 * ) + 100 * 5.91 = 1183.5
2

3
 1 4 00
If Q = 236 -> n1 = = 5.93
23 6
236
 Total cost = (5 * ) + 100 * 5.93 = 1183
2
Ex 8: Company BKH uses EOQ model for inventory management. The company’s demand
for input material of the next year is estimated to be 10,000 units. The ordering cost is $250
per order and the carrying cost is $5 per unit.
a. What is the optimal ordering quantity for the company?
b. The supplier has discount policy for their goods based on the order quantity of the
customers as follows:

Order size Price per unit

0-2000 $1

>2000 $0,75

What is the optimal ordering quantity for the company based on the above discount policy?
Compare the results of questions a and b.
SOLUTION

a. Q* =
√
2 ×250 × 1000

Q
5
= 1000
D
b. TC = (CC * ) + (OC * ) + P * D
2 Q
1000 10000
Q = 1000: TC = (5 * ) + (250 * ) + 1* 10000
2 1000
 TC = $15000
2000 10000
Q = 2000: TC = (5 * ) + (250 * ) + 0.75 * 10000
2 2 000
 TC = $13750
TC2 < TC1 -> Optimal ordering Q = 2000

Ex 9: Company HHS uses EOQ model for inventory management. The ordering cost is $75
per order and the carrying cost is $20 per unit. The optimal ordering quantity of input
material is determined to be 30 tons. At this level of order size, the firm has to pay $1,250 for
each ton of material. However, the supplier offers a discount as follows: If HHS purchases 60
tons (or more) per order, the price will be only $1,125 per ton of material. Should the
company accept this discount offer? How will the carrying cost, the restocking cost and the
total cost of inventory management and purchases change if the company does so?
SOLUTION
Q* = 30 tons
CC∗Q D
TCmin  = OC *
2 Q

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 30 D
 20 * = 75 *  D = 120 (tons)
2 30
30 120
Q = 30: TC1 = 20 * + 75 * + 1250 * 120 = $150600
2 30
60 120
Q = 60: TC2 = 20 * + 75 * + 1125 * 120 = $135750
2 60
 TC2 < TC1
 Optimal ordering Q = 60
 New OC = $150, CC = 600, TC with purchases = $135750
Ex 10: Company TTA uses EOQ model for inventory management. The company’s demand
for input material of the next year is estimated to be 20,000 units. The ordering cost is $250
per order and the carrying cost is $2,5 per unit.
a. What is the optimal ordering quantity for the company?
b. The supplier has discount policy for their goods based on the order quantity of the
customers as follows:

Order size Price per unit

0-4000 $1

>4000 $0,95

What is the optimal ordering quantity for the company based on the above discount policy?
Compare the results of questions a and b.
c. Which level of discount can justify 4000 as the better order size for the company?
SOLUTION

a. Q* =
√
2∗250∗2 0000
2,5
= 2000
5∗2000 250∗20000
b. Q = 2000: TC1 = 2 , + +1∗20000 = 25000
2 2000

5∗4 000 250∗20000

Q = 4000: TC2 = 2 , + + 0 , 95∗20000 = 25250
2 4 000
 TC1 < TC2
 Optimal ordering Q = 2000

5∗4 000 250∗20000

c. 2 , + + P∗20000 ≤ 25000
2 4000
 P ≤ 0,9375
0,9375−1
 % discount = = - 6,25%
1
Ex 11: Company TSC uses EOQ model for inventory management. The company’s demand
for input material of the next year is estimated to be 12,000 units. The ordering cost is $450
per order and the carrying cost is $1,2 per unit.
a. What is the optimal ordering quantity for the company?

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b. The supplier has discount policy for their goods based on the order quantity of the
customers as follows:

Order size Price per unit

0-1999 $1

2000-3999 $0,8

≥4000 $0,6

What is the optimal ordering quantity for the company based on the above discount policy?
Compare the results of questions a and b.
SOLUTION

a. Q* =
√
2∗12000∗450
1, 2
= 3000
3000 12000
b. Q = 3000: TC1 = 1,2 * + 450 * + 0,8 * 12000 = 13200
2 3000

4 000 12000
Q = 4000: TC2 = 1,2 * + 450 * + 0,6 * 12000 = 10950
2 4 000
 TC2 < TC1
 Optimal ordering Q = 4000
Ex 12: Company DBC uses EOQ model for inventory management. The firm has to pay $30
for preservation and insurance of each input material unit. Besides, each time the inventory
runs out, the firm has to order new material and pay $960 for delivery. The demand of input
material for the first half of the next year is estimated to be 2,000 units. For the second half of
the year, the input material demand is forecasted to double due to seasonality so the ordering
quantity has to double too. What is the optimal ordering quantity of input material for the
company in the next year?
SOLUTION
Q1 2000
TC-1sthalf = 15 * + 960 *
2 Q1
Q2 4000 2000
TC-2ndhalf = 15 * + 960 * = 15 * Q1 + 960 +
2 Q2 Q1
45 3840000
 TC-whole-year: Q1 +
2 Q1
45 3000
TC-min  TC’ = 0  – 2 = 0  Q1 = 413.11 (units)
2 Q1
 Q2 = 826.24 (units)
Ex 13: Company DVC applies ABC-system for inventory management. The inventories
include 10 types of material as follows:
Material type Cost per unit (USD) Annual usage (units)
A 75 120
B 395 38

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 C 9 180
D 20 165
E 550 60
F 85 90
G 12 175
H 30 132
I 490 68
J 60 115
a. Identify types A, B and C of inventories for the company.
b. Illustrate the ABC-system of the company on graph (Show cumulative percentages of
inventories’ types in terms of value and quantity).