Homework Assignment 2

Fall 2016

Production & Inventory Control

Due on Friday 09/23

There are 3 questions in this assignment.

All questions are equally weighted.
Please answer every question to the best of your knowledge.
Make sure to show your work for partial credit.
You are allowed to use a spreadsheet software, such as Excel.
Make sure to cite your sources, if you decide to use more material to help you solve the exercises.
Electronic submissions are preferred, but not required.
Feel free to submit any combination of Excel files and/or handwritten/typed/scanned answers.

Homework Assignment 2

Fall 2016

Question 1: Production & Machine Requirements

Assume the production scheme shown in Figure 1, where operation 4 represents rework on parts
that fail inspection upon completion of operation 2. The scrap percentages per operation are
p1 = 0.05, p2 = 0.05, p3 = 0.10, and p4 = 0.20.
1

4
Figure 1: The production schematic in the facility of Question 1.

(a) How many units must the process start with in order to meet the weekly required output of
5, 000 units?
(b) Assume that each operation (1, 2, 3, and 4) requires a specific machine to work (let them be
M1 , M2 , M3 , and M4 ). The details for each machine are provided in Table 1.
Machine
M1
M2
M3
M4

Standard Time
3 min
2 min
5 min
10 min

Efficiency
100%
95%
102%
90%

Reliability
95%
90%
90%
95%

Table 1: The details for each of the machines of Question 1.

Machines 1, 2, and 3 can run for 16 hours per day, 5 days per week. Machine 4 on the other
hand is only available 8 hours per day, 6 days per week. How many machines are needed to
perform each operation (round up to the nearest integer)?
Answer:

Homework Assignment 2

Fall 2016

Question 2: Reject Allowance

You have just received an order for 25 castings made from precious metals. Each casting will
sell for $5, 000 each; however it will also cost $2, 500 to schedule production on each individual
casting. All castings that are not sold to the customer (be if of high or low quality) can be
recycled at a value of $1, 000.
The probability of a casting being of high quality is 0.98. That is, when producing 5 castings, the
probability that all of them are of high quality is 0.985 = 0.9039. The probability for producing 3
5!
castings of high quality (when 5 are scheduled) can be calculated by 3!2!
0.983 0.022 = 0.00376.
In general, the formula for the binomial uncertainty of producing x high quality products when
Q are scheduled under a probability of success p is:
 
Q
Q!
p(x, Q) =
px (1 p)Qx =
px (1 p)Qx
x! (Q x)!
x
The customer would like to receive 25 castings in the end, however they are willing to accept less
than 25: you will have to pay them a penalty of $500 per casting short. For example, assume you
produce 24 castings of high quality: the customer will buy those for 24 5, 000 = 120, 000, but
the company will return $500 to the customer as a penalty for not delivering 25 units, bringing
down the revenue to 119, 500.
Hint: For the calculation of the binomial distribution probability, you can use the BIN OM DIST
function of Excel. Its syntax is BIN OM DIST (x, Q, p, 0). For example, to calculate the probability of 3 high quality products when 5 are scheduled and the probability of success is 0.98, we
would write in Excel BIN OM DIST (3, 5, 0.98, 0). Use three decimal points in your calculations
for simplicity.
(a) For maximum profit, how many castings should you schedule for production?
(b) Assume the customer is very dissatisfied if they receive anything less than 25 castings. How
many castings should you schedule now if you want the customer to receive at least 25 castings
99.9% or more of the time?
Answer:

Homework Assignment 2

Fall 2016

Question 3: Decision Trees

An agricultural produce company located in Iowa can deliver up to 2, 000, 000 fresh greens units
per year. The demand in Year 1 is 1, 000, 000 units in state, and 500, 000 units out of state. The
out of state demands need to be shipped to the demand locations, while no shipping is required
in-state. The selling price per unit is $2.5, while the production costs $1 per unit.
For shipping, there are two options:
1. Use a shipping company, which costs $50,000 per year. Then, produce can be shipped
with a cost of $0.25 per unit.
2. Lease trucks as needed with a cost of $5,000 per truck. Each truck can carry up to 20, 000
units. No other shipping costs are incurred.
Market research has revealed that demand in Iowa is equally likely to either increase to 1, 500, 000
units or stay the same in the next year (Year 2). Demand out of state is expected to stay the
same (that is at 500, 000 units) during that time. Independently of what happens in Year 2,
in the year after that (Year 3) there is a 25% probability that both in-state and out-of-state
demand is 1, 000, 000 units each, and a 75% chance that both in-state and out-of-state demand
is 1, 500, 000 units each.
Assume that the company always prefers selling in state, and they will always try to sell as
much of their produce as possible.
(a) Create the decision tree for the problem. Note the transition probabilities from tree node to
tree node.
(b) Using the decision tree methodology, which of the two options (use a shipping company, or
lease trucks as you go) would you recommend?
Answer:

Good luck!
4