OPIM 101 - Spring 2010

Recitation 4 Exercise

Section#(201,202,,215):_____________

Instructor(circle):HillSaundersSerafiniSodhiRamachandranYeh

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Placeyouranswersintheboxesprovided.

Millennium Liquors is a wholesaler of sparkling wines. Their most popular product is the French Bete
Noire1989.Weeklydemandisfor40cases.Assumedemandoccursover50weeksperyear.Thewineis
shippeddirectlyfromFrance.Millenniumsannualcostofcapitalis15percent,whichalsoincludesall
other inventoryrelated costs. Below are relevant data on the costs of shipping and handling. These
costsincludetheusualorderingandhandlingcosts,plusthecostofrefrigeration,whichincludesafixed
component(mainlydepreciationofthecoolingequipment)andavariablecomponentthatdependson
thenumberofcasesininventory.

Costpercase:$120
Shippingcost(foranysizeshipment):$290
Costoflabortoplaceandprocessanorder:$10
Costoflabortoplacecasesintowarehouse:$2/case
Costoflabortopickcasewhensold:$2/case
Fixedcostforrefrigeration:$75/week
Variablecostforrefrigeration:$3/case/week

Q1.Calculatetheweeklyholdingcostforonecaseofwine.(HINT:Givenwearetryingtocalculatethe
weekly holding cost that would enter into the EOQ equation, consider whether fixed costs should be
includedinthecalculation.)

Weeklyholdingcostpercase(h) $3.366perweek

=Weeklycostofcapital*Costpercase+WeeklyInventoryholdingcostpercase

=(15%/50)*($120+$2)+$3=$3.366

Note: The Fixed cost of refrigeration is associated with depreciation, and is ignored since it is a sunk
cost.Thecosttopickcaseswhensoldisignoredbecausethatisnotcapitaltiedupininventorywhile
theproductissittinginthewarehouse.
Q2. Use the EOQ model to find the number of cases per order which minimizes the total (ordering +
inventoryholding)costperunit.

K(Setupcostassociatedwithshippingandhandlinganorder)=$290+$10=$300
84.44casesperorder
R(Demand)=40casesperweek

H(Holdingcost)=$3.366perweek(fromabove)

Therefore, using EOQ, optimal Q = 2* K * R =84.44casesperorder

Q3.WhatistheaveragenumberofordersperyeargiventhatthecompanyorderstheEOQcalculated
aboveeachtime?

Timebetweentwoorders=Q/R=2.11weeks23.7ordersperyear

Averagenumberofordersperyear=50weeksperyear/(Q/R)

=50weeksperyear/2.11weeksperorder

=23.7ordersperyear

Q4.CurrentlyordersareplacedbycallingFranceandthenfollowingupwithaletter.Millenniumandits
suppliermayswitchtoasimpleorderingsystemusingtheInternet.Thenewsystemwillrequiremuch
lesslabor.Whatwouldbetheimpactofthisnewsystemontheorderingpattern?

a) Frequencyofordersincreaseandaverageinventorydecreasesa)
b) Frequencyofordersincreaseandaverageinventoryincreases
c) Frequencyofordersdecreaseandaverageinventorydecreases
d) Frequencyofordersdecreaseandaverageinventoryincreases
e) Frequencyofordersandaverageinventoryremainunchanged

SwitchingtoInternetlowerlaborcostsperorder

(becausecostforplacingandprocessingordersgoesdown)

lowersetupcostorlowerKlowerQ(becauseRandHremainthesame)

morenumberofordersperyearIncreaseinfrequencyoforders

Also,lowerQloweraverageinventory(Q/2)Averageinventorydecrease
Q5.Cornucopiaisasmallchain(15stores)thatspecializesinlocallygrownandorganicfood.Theysell
granolainlargebinssothatcustomercanpurchasethequantitytheywishandbringthegranolahome
intheirowncontainers.Granolaissoldfor$6.29perlbsandweeklydemandis700lbs.Theirsupplier
charges $25 per delivery and $3.25 per lb. They will deliver in any quantity ordered. Cornucopias
annual holding cost is 20% of the value of the inventory. (Recall, this means that holding $10 in
inventoryforoneyearwouldcost0.2x$10=$2.)WhatisCornucopiasminimumannualaveragecost
forholdinginventoryanddeliverycharges?Assume52weeksperyear.

K(Setupcostperdelivery)=$25 $1087.6peryear

R(demand)=700lbs/week=36400lbs/year

Purchasecostperlb=$3.25perlb

H=Holdingcost*Valueofinventory=20%*$3.25perlbperyear=$.65perlbperyear

Using EOQ, Q = 2* K * R =1673.3lbperyear

H

Minimumaverageannualcostforholdinginventoryanddeliverycharges

K R 1
C(Q) h Q
Q 2 =$1087.6peryear

Q6. The supplier now offers a new option. If Cornucopia purchases at least one full truckload in an
order,thentheywillwaivethe$25deliverychange(i.e.,thereisnodeliverycharge)andtake$0.06off
the price per pound (they charge $3.19 per lb). A truckload is 12,600 lbs. Assuming Cornucopia takes
advantage of this option, what will its average weekly total costs be (total costs = purchase costs +
inventoryholdingcosts+deliverycosts)?

NosetupcostofK,Discountedpurchaseprice=$3.19perlb$120,135peryear

Ordersize=12,600lbs

H=20%*$3.19perlb=$0.638perlb

Averageannualcostforholdinginventoryanddeliverycharges


K R 1
C(Q) h Q
Q 2 =$4019.4peryear

Yearlypurchasingcost(nondelivery)=R*$3.19=$116,116peryear

Therefore,Totalcost=120,135$peryear