MSCI 633: Production and Inventory Management, Winter 2014
Midterm, February 13, 2014
[10 marks] Fill the blank, multiple choice, true/false questions: [1 mark each except Q.1]
1.
Inventory management considers two major trade-offs: [1 mark each]
a. Inventory holding costs vs. inventory _____________ costs.
b. Cost of excess inventory vs. cost of _________________________.
2.
We have seen that over the years the $ value of inventories in the U.S. has increased. What is the correct measure to demonstrate the improvement in efficiency over the years:
a. Inventory - sales
b. Inventory/sales ratio
c. Seasonally adjusted inventory
d. Inventory/population ratio
True
3.
Increasing inventory turns will always result with higher sales.
4.
We have seen that 21% of General Motor’s assets are in inventory
False
compared with Walmart’s 68.5%. This must imply that General Motor is a better managed company.
5.
In the basic EOQ, the optimal solution is where the two costs (from 1a) equal each other.
6.
If the optimal order quantity devised by the EOQ setting is 800 units, but you need to deviate by 10% (i.e., order either 720 or 880), then you should order 720 as it yields lower costs.
7.
In EOQ when backlogs (i.e., backordering) are allowed, if backlogging cost is per unit per year, then the optimal Q is never smaller than QE – the
EOQ when backlogs are not allowed.
8.
By Little’s law, if the inventory turns increase and the throughput rate does not change, then inventory increases.
9.
Walmart’s inventory turns have been increasing over the years. One of the reasons for that is the increasing use of VMI by Walmart.
1
Name:___________________
student id #___________________
Problem 1: [10 marks]
The demand for a certain product occurs at a rate of 100 packets per month. Each packet contains a dozen units and costs $8. Assuming the order placement cost $20 per order, the holding cost rate to be 0.25, and that backordering cost is $10/packet/year, determine the optimal order quantity, maximum backlog allowed, the optimal average annual cost, and the proportion of the cycle with positive on-hand inventory.
Space for calculations:
The optimal order quantity is: ____________
The maximum allowed backlog is: ____________
The optimal average annual cost is: ____________
Proportion of cycle with on-hand inventory: ____________
2
Name:___________________
student id #___________________
Problem 2: [20 marks]
Consider an EOQ setting with defective units. A proportion β of all units purchased are defective. Those defective units are only discovered when consumers arrive at the store and seek to purchase them. Defective units cannot be sold and have no value. According to the agreement you have with the supplier, you do not get a refund for defective units. This means, that you incur holding cost for each unit until
