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Problem Set 3 Q1

CM is a manufacturing company that produces a carbon-intensive chemical product. It is considering switching to a cleaner raw material that emits less carbon but costs more. It must calculate costs including production quantities, annual setup and holding costs, and emission costs to determine the best option. KPS sells Venus flytraps in the spring. It must determine the optimal number to purchase based on historical demand data to minimize unsold inventory. An entrepreneur plans to sell World Cup t-shirts online. They must calculate order quantities considering demand forecasts and service level targets to ensure sufficient inventory while minimizing overstock.

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Samantha Siau
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224 views

Problem Set 3 Q1

CM is a manufacturing company that produces a carbon-intensive chemical product. It is considering switching to a cleaner raw material that emits less carbon but costs more. It must calculate costs including production quantities, annual setup and holding costs, and emission costs to determine the best option. KPS sells Venus flytraps in the spring. It must determine the optimal number to purchase based on historical demand data to minimize unsold inventory. An entrepreneur plans to sell World Cup t-shirts online. They must calculate order quantities considering demand forecasts and service level targets to ensure sufficient inventory while minimizing overstock.

Uploaded by

Samantha Siau
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Prof.

Kihoon Kim

Problem Set 3
Q1. The CM manufacturing company in Europe produces a chemical product which is
carbon emission intensive. The European Union Emission Trading Scheme restricts the
amount of carbon dioxide that CM can emit in a year. If the company emits more than
their allowed quota or allowance, it has to purchase additional emission allowances for
the exceeded amount of emissions from the trading market. Similarly, if the company
emits less than its quota, it can sell its unused emissions allowances in the same market.
The emissions trading market is large enough so the market price of emissions is
independent of CMs action.
Because of increasing interest in sustainable manufacturing, CM is considering switching
to a clean raw material that emits less carbon dioxide. However, the clean material
costs more. The unit cost and unit emission amount of each raw material option is
presented in the following table. (per unit of the chemical product.)
Raw Material Option
Normal
Clean

Cost($/unit)
10
11

Emission (ton/unit)
0.35
0.32

The company uses a 20% annual interest rate for holding costs. The annual demand for
their chemical product is 30,000 units and is constant over time. Each production run
incurs a fixed cost of $200 and a variable manufacturing cost of $2 per unit using either
raw material option.
The company currently has 10,000 tons of emissions quota and the market price of
emission allowances is $20 per ton. At the end of each calendar year, CM has to report its
total emissions level and must buy or sell emission allowances as described above.
(a) (10 points) Calculate the economic order (actually, production) quantity for the
chemical product when CM chooses a normal material option. Do the same
when CM chooses a clean material option. You can assume that the production
rate is infinite. You can ignore the emission cost, because it is charged at the end
of a calendar year.
(b) (10 points) Calculate the annual setup and holding cost for each raw material
option.
(c) (10 points) Considering all relevant costs, which raw material option should the
company choose?

Prof. Kihoon Kim

Q2. Korea Plant Shop (KPS) sells a particular type of plant called Venus Flytraps, with
the majority of the sales made in the spring months. KPS makes a one-time purchase of
the Venus Flytraps prior to each spring season at a cost of $5 each and sells each Venus
Flytrap for $15. There is also a transportation cost of $3 for each Venus Flytrap, since
they are bought in Japan and shipped to Seoul. Any Venus Flytrap unsold at the end of the
spring season is marked down to $5 and sold at a special summer sale (assume all
marked-down Venus Flytraps are sold). The following is the number of sales of Venus
Flytraps during the past 10 springs: 30, 45, 45, 35, 40, 35, 35, 45, 30 and 40.
a) (10 points) Based on the observed 10 values of the prior demand, construct an
empirical probability distribution of spring demand (cumulative distribution of spring
demand).
b) (10 points) Determine the optimal number of Venus Flytraps for KPS to buy based on
the empirical distribution.

Prof. Kihoon Kim

Q3. You, as a young entrepreneur, have decided to develop an online shopping website
which sells a World Cup T-shirt, which is purchased from a Chinese supplier. The Chinese
supplier charges $10 per each World Cup T-shirt to you. You forecast that the demand for
World Cup T-shirts is normally distributed with mean of 2,100 and standard deviation of
1,200. You are going to sell one World Cup T-shirt at $22. Unsold World Cup T-shirts will
have zero salvage value.
a. (10 pts.) What is the probability that the actual demand for World Cup T-shirt will

be less than half of the forecasted mean demand?


b. (10 pts.) If you want to achieve a service level of 98.5 percent (i.e., 98.5 percent

in-stock probability), how many World Cup T-shirts should you order?

Prof. Kihoon Kim


Q4. (20 pts) You work in the inventory planning department of a large electronics store.
The store pays $70 for each MP3 player; in addition, a fixed fee of $250 is charged for
each order. Assume the annual holding rate is 24% and there are 48 weeks (4 weeks per
month) in a year. The store wants to maintain a 97.5% service level (z = 1.96). If the
demand is constant as 500 per month, but the lead time is uniformly distributed over [3
weeks, 5 weeks], what should be the reorder point? Assume that you can round the
fractional order quantity to the nearest integer. FYI, if the lead time is uniformly
distributed over [3 weeks, 5 weeks], the lead time can be any value between [3 weeks, 5
weeks] with equal probability density.

Prof. Kihoon Kim


Q5. KBC is a bike manufacturing company located in Asia which sells two models (a
bike with a D-brake and a bike with a V-brake) in the United States. It takes 6 weeks to
ship the bikes from their factory in Asia to their distribution center in the United States.
The weekly demands for the bikes in the United States market follow Normal
distributions as follows (and they are independent):
Bikes with D-brakes ~ N(=7, 2 =62),
Bikes with V-brakes ~ N(=10, 2 =82).
The distribution center in the United States sets safety stocks so that the cycle service
level is 95%.
a) (10 pt) Calculate the mean and standard deviation of demands during the
replenishment lead time for each type of bike.
b) (10 pt) Suppose that KBC adopts an EOQ model, and the EOQ for bikes with Dbrake and V-brake are 25 and 30 respectively. Determine the safety stocks of
bikes with D-brakes and V-brakes at the Distribution Center. (FYI, Safety stock is
the difference between the reorder points and the lead time average demand.) You
should round up the answers. What is the total safety stock?
c) (10pt)Recently,thesupplychaindepartmenthassuggestedthefollowing
strategy:InsteadofproducingthebikeswithDbrakesandVbrakes,produce
genericbikeswithoutbrakesintheAsiafactory.Oncethegenericbikesare
shippedtothedistributioncenterintheUnitedStates,eachbrakewillbeaddedto
thegenericbikesatthedistributioncenteraccordingtothecustomerdemands.
TheadditionalbrakeassemblingprocessattheU.S.distributioncenterwillcost
$1600/yearwhiletheunitholdingcostforthebikes(withorwithoutbrakes)is
$80/year.Supposetheholdingcostforthebrakepartsandthetimetoaddthe
brakestothebikesarebothnegligible.Furthermore,theproductionand
transportationrelatedcostsdonotchangewiththeintroductionofagenericbike.
Calculatethesafetystockofgenericbikesneededunderthisstrategywhenthe
EOQforthegenericbikeis55.(Youneedtorounduptheanswer.)Shouldthe
companyacceptthestrategysuggestedbythesupplychaindepartment?Whyor
whynot?
(Hint: if X and Y are random variables with x and y as their standard deviations,
the standard deviation for X+Y is x2 + y 2 .)

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