Chapter 5, Problem 28AP

a.

Summary Introduction

Interpretation: The inventory control model for a highly volatile paint thinner having a shelf life of only 3 months and significant variations in demand pattern is to be determined.

Concept Introduction: This is thecase of a perishable product, ordered in a single period; with variations in demand during the single period. This is a case for application of Newsvendor model. Just as a newspaper becomes useless at the end of the day; the thinner will become useless after three months i.e. the ordering period.

Explanation of Solution

1. In this model, every period starts with zero initial inventory (the previous left over inventory, if any, is unusable.
2. The demand, though varying, follows a certain probability distribution.
3. The model mathematically optimizes the ordering quantity to minimize loss due to unsold items at the end of the single period. The model takes into consideration the cost, the selling price and the resulting loss per unit of the item.

B.

Summary Introduction

Interpretation:The inventory control model for a white oil-based paint with an almost regular demand is to be identified.

Concept Introduction: A regular EOQ model (economic order quantity) is available for items with a steady demand and price. Economic order quantity balances the ordering costs v/s the inventory holding costs of the inventory items. This is through a mathematical calculation which takes into account the ordering costs, the holding costs, the annual demand etc.

This model is suitable for non-perishable items with relatively stable demand and regular lead time.

Explanation of Solution

1. All parameters for calculating the EOQ are available (except the holding rate which is normally known).
2. EOQ model is the right choice.

C.

Summary Introduction

Interpretation:The inventory control model to be used for burnt sienna oil paint, having a variable demand is to be identified.

Concept Introduction: Q, R models with various options are available for items with varying demands. The items are sold during their lifetime.

Explanation of Solution

1. Q, R model with a service level of 2 shall be appropriate for this case.
2. Service level 2 is suggested because, the chances of a stock out look to be remote.

D.

Summary Introduction

Interpretation:The inventory control model to be used for synthetic paint brushes with a steady demand with good profit margin is to be identified.

Concept Introduction: In this case of a steady demand item (and most probably a small value item-may be a B item), there is the additional offer of a discount for higher quantity orders.

Explanation of Solution

1. A low value item; goes for EOQ model; buy a higher quantity to get discounts.
2. In fact, since the demand and prices are steady, whole year’s requirement should be procured once.

E.

Summary Introduction

Interpretation:The inventory control model to be used for camel hair brushes with a variable demand, price discounts is to be identified.

Concept Introduction: This again is a low value and low space requiring item andcarrying somewhat extra inventory will not hurt.

Explanation of Solution

1. A low value item; place one yearly order with quantity discounts.
2. Arrange for staggered 4 or 6 monthly dispatches after review.
3. The item is not perishable. Even if some extra inventory is held, it would hardly affect.