OM Midterm Exam 2020 Solution

Q1. Weekly demand for bags of potato chips at a store is normally distributed with
a mean of 1,000 bags and a standard deviation of 150 bags. Assume the following
data:
● There are 50 working weeks in a year.
● The store receives each delivery 4 weeks after placing the order with its supplier.
● Fixed cost per order is $100.
● Each bag costs $1.
● Annual holding cost rate is 25% of the unit cost of bags.
● Currently, the store follows a continuous review policy and places an order for 20,000
bags whenever the inventory on hand depletes to 4,200 bags. The store places orders
via paper that is faxed to its supplier.

1. Out of the following options, select the range which contains the current
probability that the store would run out of stock. [5 marks]
a. between 0.23 and 0.29
b. between 0.64 and 0.70
c. between 0.71 and 0.77
d. between 0.30 and 0.36

2. What are the current annual ordering and holding costs? [5 marks]
a. Ordering cost $250 and holding cost $2550
b. Ordering cost $350 and holding cost $2550
c. Ordering cost $250 and holding cost $2500
d. Ordering cost $250 and holding cost $2650

3. The store has now implemented an electronic ordering system. This will reduce
the lead time from 4 weeks to 1 week. Furthermore, instead of ordering 20,000
bags every time, the store has decided that the size of each order placed will be
equal to the Economic Order Quantity. The store has also decided to maintain a
service level of 95%. Given that the store has already implemented all these
modifications to its inventory management policy, how long, on an average, will a
bag of chips remain in the store? [5 marks]
a. 3.4 weeks
b. 4.1 weeks
c. 2.4 weeks
d. 3.9 weeks

Solution:
Part 1: (a)
demand/week = N(1000,150)
L = 4 weeks
Q = 20,000
ROP = 4,200
We know: ROP=Lead time demand + z*Lead time sigma
Therefore:
LTD = L×weekly demand = 4×1000 = 4,000.
Lead time sigma = sigma*L^0.5 = 300.
z=0.6667. corresponding service level=0.747, Prob(stockout)=0.253.

Part 2: (a)
Number of week per year = 50 weeks /yr
Ave. annual demand = 50,000
S =100
C=1
H=0.25C = $0.25
Av. inventory each cycle =Q/2 = 20000/2
Safety stock inventory = ROP – LTD
Safety stock inventory = 4200 - 4000 = 200
Total Average inventory = Av. inventory each cycle + Safety stock inventory
I = Total Average Inventory = 20000/2 + 200 = 10200
Number of orders R/Q
R/Q = 50,000/20,000 = 2.5
Ordering cost = 100(2.5) = 250
Annual holding cost = 0.25% ×1 ×10200 =2550

Part 3: (a)
EOQ =sqrt ((2*50000*100)/0.25) =6325
Standard deviation of weekly demand = 150
Lead time, L = 1 week
Mean demand during L = 1*1000 = 1000
Standard deviation of demand during L = sqrt(1)*150 = 150
For a service level of 95%, z = 1.65
Safety stock = 1.65*150 = 247.5
Total Average inventory = Q/2 + Safety stock inventory
Total Average Inventory = I = (6,325/2) + 247.5 = 3,410.
Average time in store I = RT
3410 = 1000T , T = 3.41 weeks

Q2. Ramesh is a hard-working young man who sells tea at his roadside stall to drivers of trucks
which ply along the road. He works through the night from 9 pm until 7 am. Throughout this
time, trucks pass by his stall at an average rate of 20 per hour. 85% of all the truck drivers stop
at his stall for tea. On an average, Ramesh takes 2 minutes to serve a customer. Ramesh is also
studying for his engineering entrance examinations. During the times that he is not busy
preparing or serving tea at his stall, he solves mathematics problems as a part of his preparation.
He takes 20 minutes on an average to solve a problem. Assume that coefficients of variation
of all relevant durations are 1.
1. How many problems can Ramesh solve in one night? [5 marks]
a. 10
b. 23
c. 5
d. 13
2. How long does a customer spend at the tea stall, on an average? [3 marks]
a. 2.6 minutes
b. 4.6 minutes
c. 1.3 minutes
d. 2.0 minutes
Solution:
PART 1: (d)
# of working hours = 10 hrs per day; rate at which trucks pass=20 trucks/hr.
m=1; p=2 minutes; time taken per math problem = 20 min/problem.
Therefore:
# of customers = 0.85*20 = 17 customers/hr.
a=3.5294 minutes.
utilization = 0.5667.
idle fraction=1-0.5667 = 0.4333.
total idle time per day = 0.4333*10 = 4.33 hrs = 260 min.
# of math problems solved per day = 13.

PART 2: (b)
Tq=2.615 minutes, T = Tq + p =4.615 minutes.

Q3. In Kristen’s Cookie case assuming you can order only one dozen cookies per order,
which of the following activities had the lowest hourly capacity? Assume there is only one
oven. [1 mark]
a. Mixing and Spooning
b. Baking
c. Cooling
d. Packing

Solution: (b) See the case for detail.

Q4. In Kristen’s Cookie case If you open your shop at 12.00 am, when will you collect
money for your first order? Assume that each order is for two dozen single type cookies.
Furthermore, assume there is only one oven. [1 mark]
a. 12.53 am
b. 12.54 am
c. 12.27 am
d. 12.37 am

Solution: (d) See the case for detail.

Q5. Suppose you have two technology choices to drill hole on circuit boards. One with a
laser beam, another one with an electromagnetic beam. There are 30 holes to be drilled on
one board. The laser beam machine has a setup time of 15 minutes and takes 2 seconds to
drill one hole. The electromagnetic beam machine has a setup time of 20 minutes and takes
0.75 minute to drill all holes on a board. What should be the minimum order size where an
electromagnetic beam machine will not take more time compared to Laser beam machine? [2
marks]

a. 4
b. 5
c. 20
d. 21
Solution: (c)
2 seconds per hole
30 holes to be drilled hence it takes 1 min to drill a board in laser beam drill
15 + 1*x = 20+ 0.75x;
x = 20

Q6. Consider the existing cutting operations for regular shirts at the Executive Shirt Company
factory. Assume that it takes 1.5 minutes to set up 3 layers and each layer has 10 shirts.
Furthermore, assume that 60 layers of shirts need to be laid out for the cutting stage and it takes
30 minutes for cutting all the 60 layers together. What is the capacity of the cutting stage? [2
marks]
a. 13 shirts per minute
b. 14 shirts per minute
c. 9 shirts per minute
d. 10 shirts per minute

Solution: (d)
# of layers = 60; # of shirts per layer = 10; time to set up 1 layer = 1.5/3 = 0.5 minute.
Therefore:
Total time at cutting stage = 0.5*60+30 = 60 minutes.
Total # of shirts = 60*10 = 600.
Capacity of cutting station = 600/60 = 10 shirts/min.

Q7. Which action, if taken by the management at Shouldice Hospital, would be the greatest
deviation from their core business model? [1 mark]
a. Open another branch in Kitchener, Ontario, Canada
b. Open another branch in New York City, New York, USA
c. Add new O.R.s for repairing hernias using mesh-insertion technique
d. Introduce Saturday operations
Solution: (c) See the case for detail.