Inventory Management

MGT 303 Operations Management

Midterm Exam 3

October 27, 2020

_______________________________________

Last Name, First Name (Please print)

Question 1: 14 points

Question 2: 6 points

Total: 20 points

Instructions:

1) The exam has two questions. Please answer both questions in the space provided.

2) The exam is open book, open notes, and open computer. Calculators are allowed.

3) This is an individual exam. Collaboration or consultation with anybody is strictly prohibited.

4) Please show your work. Partial credits will be given for partially correct answers.

5) The total time for the exam is 75 minutes. The exam is due on Blackboard at 11am.

6) Have fun and good luck!

Honor Pledge: I will neither give nor receive inappropriate assistance in taking this examination.

_______________________________

Signature (You can sign or type your name here as your electronic signature.)

Question 1 (14 points)

You are asked to manage the inventory system for a particular product at a retail store. The store has collected the following information on this product:

Demand = 10,000 units/year

Standard deviation of weekly demand = 25 units

Ordering costs = $30/order

Holding costs = $4/unit/year

Cycle-service level = 95%

Lead-time = 2 weeks

Number of weeks per year = 50 weeks

a) (3 points) Currently the store uses the periodic review policy to control the inventory. What would be the optimal control parameters (P, T)?

b) (3 points) Given the above optimal control policy for the periodic review system, what is the total annual policy-related cost for the inventory system?

c) (2 points) Suppose T = 900 is actually used for the periodic review system. What is the cycle-service level for the inventory system?

d) (3 points) Now the store is thinking about switching from the periodic review policy to the continuous review policy for the inventory system. What would be the optimal control parameters (R, Q) for the continuous review policy?

e) (3 points) Given the above optimal control policy for the continuous review system, what is the total annual policy-related cost for the inventory system?

Question 2 (6 points)

Suppose you are responsible for managing inventory of an item for which the weekly demand is 500 units. The cost to process and ship an order is a fixed $75. Inventory holding costs are charged at 15% of the variable purchasing cost per unit per year (assume a 50 week year). There are two vendors who can supply this item; both charge the same price of $4 per unit.

a) (2 points) What is your (ideal) optimal order quantity? How often should you place your order with this order quantity?

b) (4 points) However, both vendors who can supply this item have their own restrictions on ordering. Vendor A ships items only once every 4 weeks. Vendor B accepts only orders of 3,000 units or more. Which vendor would you choose? Why? Show calculations to support your recommendation.

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MGT303 Midterm Exam 3