operation management

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OM 305

Dr. Robert Aboolian

Assignment # 4

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Problem 1 (15 points) A food processor uses approximately 100,000 glass jars a year for its fruit juice product. Annual holding cost is $1.60 per jar,

and reordering cost is $128 per order. Because of storage limitations, a lot

size of 2,000 jars has been used.

a) What penalty is the company incurring per year because of its storage

limitation?

b) The storage limitation has been resolved, but the manager would prefer

ordering 40 times each year but would have to justify any change in order

size. One possibility is to simplify order processing to reduce the ordering

cost. What ordering cost would enable the manager to justify ordering 40

times a year?

Problem 2 (5 points) Demand during lead-time for HP printers at a Sam’s Club store is normally distributed, with a mean of 600 and a standard

deviation of 200. The store manager continuously monitors inventory and

orders 5,000 printers when the inventory drops to 1,000 printers. How

much safety inventory does the store carry? What service level does Sam’s

club achieve as a result of this policy?

Problem 3 (20 points) A company will begin stocking remote control

devices. Expected monthly demand is 800 units. Ordering cost is $20 and

annual holding cost is $2.40 per unit per year. The devices can be

purchased from either supplier A or supplier B. Their price lists are as

follows:

Which supplier and order size the company should use?

Quantity Unit Price Quantity Unit Price

0-199 14.00$ 0-149 14.10$

200-499 13.80$ 150-349 13.90$

500+ 13.60$ 350+ 13.70$

Supplier A Supplier B

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Problem 4: (10 points) Viapy is a company that produces all kinds of major appliances. Suzan Curtis, the president of Viapy, is concerned about

the production policy for the company’s best- selling refrigerator. The

annual demand has been about 8,000 units each year, and this demand has

been constant throughout the year. The production capacity is 200 units per

day. Each time production starts, it costs the company $ 120 to move

materials into place, reset the assembly line, and clean the equipment. The

holding cost of a refrigerator is $ 50 per year. The current production plan

calls for 400 refrigerators to be produced in each production run. Assume

there are 250 working days per year.

If Suzan Curtis wants to minimize the total annual inventory cost, how

many refrigerators should be produced in each production run? How much

would this save the company in inventory costs compared to the current

policy of producing 400 in each production run?