# Operations Management Ch.7 & 8

Instructions

1. Read text: Chapters 7 & 8.
2. Read PowerPoint Slides for Chapters 7 & 8.
3. Submit solutions to the following textbook problems by Sunday:

Chapter 7: Problems 9, 11, 12, 14, 17 & 26.  Chapter 8: Discussion Questions 3, 12 & 15.

Chapter 7

Problem 9:

Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:

Average demand= 20 units per day

Average lead time= 30 days

Item unit cost = \$50 for orders of less than 200 units

Item unit cost = \$48 for orders of 200 units or more

Ordering cost = \$25 Inventory carrying cost= 25%

The business year is 250 days

The basic question:

How many chairs should the firm order each time? Assume there is no uncertainty at all about the demand or the lead time. There are many associated questions, such as what will the firm’s average inventory be under each alternative? What will be the breakdown of costs for each alternative?

Problem 11:

A company experiences annual demand of 1,000 units for an item that it purchases. The rate of demand per day is very stable, with very little variation from day to day. The item costs \$50 when purchased in quantities less than 100 and \$48 for 100 items or more. Ordering costs are \$40 and the carrying cost is 25 percent. How much should the company buy each time an order is placed?

Problem 12:

Meyer Stores carries a specialty line of flavored syrups. On average, Meyer sells 30 bottles per week of its popular raspberry syrup. Meyer’s cost is \$8 per bottle. Meyer has determined its order cost to be \$50 and inventory carrying cost is 20 percent. Meyer is open for business 52 weeks per year.

1. What is the EOQ for raspberry syrup?
2. If Meyer orders the EOQ quantity each time, what will be the inventory turnover rate for raspberry syrup?

Problem 14:

Johnson Corporation has the following information about a product that it carries in stock:

Average demand= 40 units per day

Average lead time= 15 days

Item unit cost = \$55 for orders of less than 400 units

Item unit cost = \$50 for orders of 400 units or more

Ordering cost = \$30

Inventory carrying cost = 20%

The business year is 300 days

Standard deviation of demand = 2.5 units

Standard deviation of lead time = 1.5 days

Desired service level= 97.5%

1. What is the annual total acquisition cost of ordering at the \$55 price?
2. What is the annual total acquisition cost of ordering at the \$50 price?
3. What level of safety stock should Johnson maintain for the item?
4. If Johnson chooses the ordering policy that results in the lowest total annual acquisition cost and maintains the safety stock level for 97.5 percent service, what will Johnson’s average inventory be for this item?
5. Given your answer in d, what will the annual inventory turnover rate be for this item? What will the reorder point be for the item?

Problem 17:

Freeport Corporation finds that average demand for surfboards is 10 units per day, with a standard deviation of 3 units. Lead time from the supplier averages 12 days, with a standard deviation of 2 days. The item costs \$50 and the inventory carrying cost is 30 percent.

1. Suppose management decides to offer a 95 percent service level; that is, it is willing to experience a stockout probability of 5 percent during the order cycle. How much safety stock should be carried?
2. How much is the annual inventory carrying cost of the safety stock because of this decision?
3. You decide that you want this company to give better service to its customers. You decide that a 99 percent service level is appropriate. How much safety stock must be carried to offer this service level?
4. What is the additional inventory carrying cost that will be incurred on this item because of your decision to increase the service level?
5. What will the reorder point be for the company if your decision is implemented?

Problem 26:

You are the buyer for your university bookstore. One of the textbooks has a cost to you of \$100 and you sell it to students for \$140. Any copies of the book that you order and do not sell to students can be returned to the publisher for an average \$80 credit. (Sometimes you can get full credit, but sometimes a new edition is published so you get no credit.) In one particular course, demand has averaged 400 books each semester, with a standard deviation of 40. What is your target service level? What is your target order quantity for the course?

Chapter 8

Discussion Question 3:

Why is achievement of the following goals critical to the success of lean systems?

1. Setup time and cost reduction.
2. A relatively stable shop load.
3. Employee empowerment. d. Statistical quality control.

Give an example of how each area contributes to the success of a lean system.

Discussion Question 12:

Can lean systems enhance a worker’s quality of life? Discuss the pros and cons from an employee’s point of view.

Discussion Question 15:

Imagine that your customer base is located in North America and your suppliers are located in China. Is it possible to implement lean supply chain management under such conditions? What are the challenges now facing the firm?

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