Hey could you guys help me with question number 3??
Business Logistics Exam 3 Practice Set and Review ? Fall 2016
1. Ray?s Satellite Emporium wishes to determine the best order size, safety stock and reordering point
for its best-selling newly remodeled satellite dish?the SuperRay. Ray estimated the following
information from his detailed records on his favorite dish. He got out his statistics textbook that he
saved from college and calculated the standard deviation of daily demand to be able to estimate the
variation of demand during lead time?useful for calculating the amount of extra dishes to have on
hand. He wanted to have a dish available no less than 95% of the time. Use z = 1.65
a) Using the EOQ model, how many should Ray order each time? 2 ? 1440 ? $20 = ?
= 45 $28
b) How much safety stock will Ray need to hold for this item to meet his service goals? = ?02 ? 42 + 12 ? 5=2.24
SS=z*?=1.65*2.24=3.70 => 4 units
c) What is the total annual inventory and ordering cost if Ray orders at the EOQ? = 45
? $28 +
? $20 = $630 + 640 = $1,270
45 d) What is the statistical reorder point?
ROP=4*5+4=24 (average demand *average lead time + SS level)
e) How many orders does Ray need to place over the course of one year? 1440
= 32 45
f) How much does purchasing and holding safety stock add to total cost in year 1?
Purchasing SS= 4*$80=$320 (SS level* purchase cost per unit)
Holding SS= 4*$28= $112 (SS level*k*c) Business Logistics Exam 3 Practice Set and Review ? Fall 2016 If Ray decided not to carry the safety inventory, what would his reorder point be?
ANS (5*4 = 20) 2. Ray?s Satellite Emporium also wishes to determine the best order size, safety stock and reordering
point for its old standby dish?the RayGun. Ray estimated the following information from his
detailed records on the RayGun. He wanted to have a dish available no less than 95% of the time. use Z = 1.65
a) Using the EOQ model, how many should Ray order each time? 2 ? 2160 ? $20 = ?
= 64 $21
b) How much safety stock will Ray need to hold for this item to meet his service goals? = ?02 ? 62 + 22 ? 5=4.47
c) What is the total annual inventory cost if Ray orders at the EOQ? = 64
? $21 +
? $20 = $672 + 675 = $1,347
64 d) What is the statistical reorder point?
ROP=6*5+7=37 (average demand *average lead time + SS level) Business Logistics Exam 3 Practice Set and Review ? Fall 2016 e) How many orders does Ray need to place over the course of one year? 2160
= 34 64
f) How much does purchasing and holding safety stock add to total cost in year 1?
Purchasing SS= 7*$60=$420 (SS level* purchase cost per unit)
Holding SS= 7*$21= $147 (SS level*k*c)
$420 + $147 = $567 in year one Business Logistics Exam 3 Practice Set and Review ? Fall 2016 3. Ray operates a small network of organic grocery stores that he services from a central
warehouse. Ray was contacted by his wholesaler who asked whether he would consider
changing his order quantity on a line of cereal products. Citing high costs of servicing
Ray?s orders (mainly because the wholesaler paid the transportation), the wholesaler
offered to negotiate with Ray to change (increase) his order quantity. Ray thought the
wholesaler was making about 20% profit on the cereal products and he guessed that the
wholesaler?s holding costs were about 25% of its unit costs. Ray looked at his own
records and compiled the following:
Annual Demand (D) 130,000 Order cost per lot (S) $ 100 Unit cost (C) $ 3.00 Holding cost factor (k) 35% Distributer
Order cost per lot (S) $ 400 Unit cost (C) $ 2.50 Holding cost factor (k) 25% Complete the tables below. Important: Round order quantity and number of orders to nearest
whole number before calculating order cost. Round all other numbers to the nearest whole
number and enter as #,###
Warehouse Orders Independently
Economic Quantity Ordered by
Warehouse ordering cost Warehouse holding cost $ Orders optimize joint costs
4,976 Quantity that minimizes total
cost 2,613 Warehouse ordering cost 2,612 Warehouse holding cost a. 8,810
$ b. 1,476
(Q/2*k*c) Business Logistics Exam 3 Practice Set and Review ? Fall 2016 Warehouse total cost 5,215 Warehouse total cost Distributer order cost 10,450 Distributer order cost Distributer holding cost 1,555 Distributer total cost
Total cost across both parties $ 6,101
d. 5902 (D/Q*S)
(Q/2*k*c) Distributer holding cost 12,005 Distributer total cost 17,220 Total cost across both parties What exactly are the supply chain dollar savings from
ordering at a quantity that optimizes supply chain costs?
What is the minimum amount that Ray could consider
accepting to change his Order Quantity? 8655
$ g. $ 2,464 ($17,220-$14,7546) h. $ 876 (6,101-5,225) f. 14756 Business Logistics Exam 3 Practice Set and Review ? Fall 2016
4. Bob's Sports has problems with its best-selling basketball?the BounceBall. Bob, the owner, tells
you that he always seems to have too many or too few of the BounceBall. He has hired you to
help determine how much and when to order. At the same time, the company is considering
quotes from 2 different suppliers, and you will help compare suppliers. You estimated the
following information from the detailed records that Bob kept on the basketball. You calculated
the standard deviation of daily demand to be able to estimate the variation of demand during
lead time?useful for calculating the amount of extra basketballs to have on hand to minimize
stockouts that plagued Bob. Bob wanted to have the BounceBall available no less than 95% of
the time. Requirements (annual forecast)
Average daily demand
Standard deviation of daily demand
Order processing cost
Annual inventory holding cost factor Description
Per unit price of basketball 5,000
30 % Supplier 1 units
units (365 days)
per year Supplier 2
44 41 Average lead time in days 5.00 2.00 Standard deviation of lead time days 1.00 1.00 Business Logistics Exam 3 Practice Set and Review ? Fall 2016 Note, do the interim calculations first and then use this supporting data in the total cost
calculations. For instance, use number of orders (rounded) to calculate order cost.
Interim calculations Supplier 1 EOQ Supplier 2
615 638 (Basic EOQ formula) 8 8 (5000/638) = 7.8 Number of units for safety stock 23 23 (see formula above) Reorder point with safety stock 92 51 ((13.7 X 2) + 23) = 50.4 Number of orders Total Cost Calculations
Total purchasing cost Supplier 1 Supplier 2 $ 220,000 $ 205,000 (5000*$41) Ordering cost 4,000 4,000 (8*$500) 1st year cost of safety stock 1,012 943 (23*$41) Holding cost of safety stock 304 283 (23*0.3*$41) 4,059 3,924 (638/2*0.3*$41) $ 229,375 $ 214,150 Holding cost of cycle stock
TOTAL COST Business Logistics Exam 3 Practice Set and Review ? Fall 2016 5. The quality assurance manager is assessing the capability of a process that puts pressurized
grease in an aerosol can. The design specifications call for an average of 55 pounds per square
inch (psi) of pressure in each can with an upper specification limit of 60 psi and a lower
specification limit of 50 psi. A sample is taken from production and it is found that the cans
average 51 psi with a standard deviation of 2 psi. What are the two standard deviation Cpk
statistics for the upper and lower specification limits? What do these values tell you? The CEO
intends to launch a new quality initiative which implies the use of three standard deviation Cpk
statistics. How would this change your results and what action would you recommend as a
result? Two std. deviation Cpk statistic: = = 60?51
=> 2.25 acceptable
=> 0.25 not acceptable,
?2?2 need to ensure cans have enough pressure Three std. deviation Cpk statistic: = = 60?51
=> 1.5 acceptable
=> 0.166 not acceptable,
?3?2 need to ensure cans have enough pressure 6. Blake, owner of Blakester?s Italian restaurant, keeps track of customer complaints. For each
customer interaction, there are four possible causes of complaints: incorrect order served, food
cold, long waiting time for food or unfriendly servers. Each week, Blake calculates the rate of
?defects? per total customers, and then uses this information to determine his company?s Six
Sigma quality level. During the past week, his company served 700 customer. His company
received fifteen incorrect order complaints, twenty cold food complaints, 35 long waiting time
for food complaints, and seven unfriendly server complaints.
a) What is the company?s DPMO for last week? = (35 + 15 + 20 + 7)
4 ? 700 ? 1,000,000 = 27,500
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