OPNS 430 Team Inventory Problem Set
Team Inventory Problem Set
Question 1
Chicagoland Sweets is a commercial baker that provides baked goods such as cookies and muffins to
several coffee houses and snack bars around the Chicago area. Flour is an ingredient to many of their
products, so they use it at a fairly constant rate. They currently follow a policy of ordering 16,000
pounds every four weeks. (That is equivalent to 20 days since Chicagoland Sweets operates 5 days
per week and roughly 250 days per year.) Their supplier sells flour in 50-pound bags at a price of
$20 per bag. Chicagoland’s management estimates that it cost $64 every time that they place an order
for flour. Their cost of capital is 25% per year.
a) What are Chicagoland’s annual inventory related costs (both holding and ordering) under
their current policy? What are their inventory costs per unit sold (i.e., total inventory cost
divided by the demand rate)? Can you suggest a better policy?
b) Chicagoland Sweets has signed on a few new accounts. Management estimates that they
will need twice as much flour per week. The purchasing manager likes the simplicity of
ordering once every four weeks and has suggested sticking to that schedule and just
ordering a larger quantity each time. The head chef would prefer to order more frequently.
She has suggested keeping the order quantity constant at 16,000 pounds and ordering once
every two weeks. What are annual total inventory costs and inventory costs per unit sold
under the purchasing manager’s plan? Under the head chef’s?
c) What is the optimal order quantity? What are the resulting annual total inventory costs and
inventory costs per unit sold?
d) Using Excel, plot the inventory cost per unit sold for the purchasing manager’s policy
(order once every four weeks), the chef’s policy (always order 16,000 pounds) and the
optimal for demand going up by a factor of 4, a factor of 8, and a factor of 16.
Question 2
Rijul owns two Toys & Games stores: one in Evanston and one in St Paul, Minnesota. He is planning
to carry a new version of the Shoots & Ladders featuring Thomas the Tank Engine. Based on the
market research, he has figured out that the weekly demand at Evanston location would be normally
distributed with mean of 40 games and a standard deviation of 8, whereas the mean weekly demand
at St Paul would be normally distributed with mean of 40 games and a standard deviation of 4.
a) The supplier of the game has a lead-time of 4 weeks. How much safety stock does Toys &
Games needs to carry at each location if Rijul wants to provide a cycle service level of
95%. What should be the re-order point for each location?
b) Toys & Games will pay $8.75 for each game and has a cost of capital of 20%. What will be
the annual holding cost due to safety stock at each store for safety stock for this game?
c) Assuming that the two stores have the same fixed cost to placing an order, which store
would you expect to have higher turns for this game?
d) Rijul just learned that the lead time for the game will increase from four weeks to six. He
has consequently increased the ROP for each store by 50%. He argues that this will allow
Toys & Games to maintain the same cycle service level as before. Is he correct? (You don’t
need to calculate the new reorder points.)
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OPNS 430 Team Inventory Problem Set
Question 3
Marisol is new to town and is in the market for a phone service with a data plan. She has settled on
Wildcat Cellular, which will give her a free phone if she signs a one-year contract. Wildcat offers
several data plans. One plan that she is considering is called “Pick Your Gigs”. Under this plan, she
would pay a monthly access fee of $25 per month which includes unlimited Talk and Text; in
addition, she should also specify a quantity of gigabytes (GB), say x, per month that she would buy
at $5 per gigabyte. Hence, her upfront cost would be $25 + $5x. If her usage is less than her chosen
quantity x in a month, she loses the gigabytes (i.e., data does not rollover). If her usage in a month
exceeds this quantity x, she would have to pay $15 for each extra gigabyte (that is, each gigabyte
used beyond x). For example, if she contracts for x = 10 GB per month and her actual usage is 5 GB,
her total bill is $25 + $5/𝐺𝐵 × 10𝐺𝐵 = $75.00. However, if actual usage is 15 GB, her total bill
will $25 + $5/𝐺𝐵 × 10𝐺𝐵 + $15/𝐺𝐵 × (15𝐺𝐵 − 10𝐺𝐵 ) = $150.00.
Once she signs the contract, she cannot change the number of gigabytes specified for a year. Marisol
estimates that her monthly needs are described by the following distribution:
Gigabytes (GB) Prob(Usage = GB) Prob(Usage ≤ GB)
5 0.02 0.02
6 0.04 0.06
7 0.03 0.09
8 0.11 0.20
9 0.35 0.55
10 0.08 0.63
11 0.14 0.77
12 0.04 0.81
13 0.04 0.85
14 0.09 0.94
15 0.06 1.00
This distribution has a mean of 10.08 GB and a standard deviation of 2.41 GB.
If Marisol chooses the “Pick Your Gigs” plan described above, how many gigabytes should she
contract for?
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