NCC 5080, Managing Operations

Final Examination SOLUTION

2019

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Instructions
1. 2 hour exam, total number of points = 25.
2. Numeric calculators and one 8.5x11” sheet (both sides) of notes are permitted.
3. Write in the space provided. You may write on the back of a page for extra space.
4. You may not ask any questions. If you are unclear on a question, write down your
interpretation and state any assumptions in your answer.
5. There is no partial credit for multiple-choice questions. For other questions, show your work
when appropriate: correct work and correct reasoning may receive partial credit.

Grading

Questions Possible Points Deductions Total Points

1–2 4

3–4 3

5–7 5
8 – 10 5

11 – 14 4

15 – 18 4

1 – 18 25

1
The following description applies to questions 1-2.
Gaur’s Tire Shop sells tires and rims at a fairly steady rate of 85 and 25 per week. A typical tire costs
$180 and a typical rim costs $650. Gaur's uses an annual holding cost rate of 15%. Assume that there
are 50 weeks in a year.

1. [2 points] Gaur’s orders its tires from Tires-R-Us which charges a fixed cost of $750 per order, and its
rims from Rims-R-Us which charges a fixed cost of $2100 per order. What is the order size that Gaur’s
should use if it wishes to minimize its annual holding and ordering cost associated with its tires (round
up any fractional units)?

K = 750; D = 50*85 = 4250 per year; h = 0.15*$180= $27/unit-year

Q* = sqrt (2*K*D/h) = sqrt(2*750*4250/27) = 485.91 = 486

Note: Most students got this correct.

2. [2 points] Tires-R-Us and Rims-R-Us merged and Gaur’s now has the ability to combine orders for
tires and rims at a fixed cost of $2500 per order (i.e. tires and rims can be shipped together).
Gaur’s has decided to place an order every 12 weeks. What is the resulting annual total cost under
this new policy (holding and ordering cost)?

If an order is placed every 12 weeks, then:

Orders per year = 50/12 = 4.167.
Order quantity for tires = 85*12 = 1020.
Order quantity for rims = 25*12 = 300
Holding cost per tire = 0.15*$180 = $27/unit-year
Holding cost per rim = 0.15*$650 = $97.5

Annual Cost = $2500*(50/12) + (1/2)*1020*$27 + (1/2)*300*$97.5 = $38,812

Note: Quite a few students correctly answered this more challenging question. It does not require
one to apply the EOQ formula. Instead, one has to recognize that for annual costs, the shipments
for two products can be combined, but holding costs must still be incurred for both products.
Therefore, one must augment the annual cost equation to incorporate the two costs for holding
product (and also consider the order quantity for ties and rims, assuming an order is placed every
12 weeks). We performed similar steps to this in class when we first derived the cost function.

2
The following description is for questions 3-4.
Nelson Corp. is considering investing in four bonds; a total amount of $1 million is available for
investment. The expected annual return on each bond, the worst-case annual return, and the “duration”
of each bond are given in the table below. (The expected and worst-case returns were estimated by
economists at Nelson Corp. The duration is a measure of the bond’s sensitivity to interest rates.)

Expected return Worst case return Duration

Bond 1 13% 7% 3
Bond 2 8% 2% 4
Bond 3 12% 10% 7
Bond 4 14% 9% 9

Nelson wants to maximize the expected return from its bond investments, subject to two constraints:
• The worst case return of the bond portfolio must be at least 8%.
• The average duration of the portfolio must be no more than 6. For example, a portfolio that
invests $600,000 in bond 1 and $400,000 in bond 4 has an average duration of
600,000∗3 + 400,000∗9
600,000 + 400,000
= 5.4

Nelson wants to solve this problem using linear programming. Assume the decision variables B1, B2, B3,
B4 are defined as $ investment in Bond 1, Bond 2, Bond 3, and Bond 4. No short sales are allowed. Do
not assume that all $1 million must be invested. Answer the following questions by writing the
appropriate algebraic mathematical formula, equation, or inequality using the variables defined above.

3. [1 point] Write the objective function for this linear program in terms of the variables B1, B2, B3
and B4, and whether it should be maximized or minimized.

Maximize Exp Return = 0.13*B1 + 0.08*B2 + 0.12*B3 + 0.14*B4

Note: You cannot divide by (B1+B2+B3+B4), this would be a non-linear objective function.

4. [2 points] Write the constraint for this linear program for the average duration of the portfolio to
be no more than 6.

(3 B1 + 4 B2 + 7 B3 + 9 B4) ≤ 6 (B1 + B2 + B3 + B4)

Or,
- 3 B1 – 2 B2 + B3 + 3 B4 ≤ 0

Note: The constraint should be linearized. In other words, this is not acceptable:
(3*B1 + 4*B2 + 7*B3 + 9*B4) / (B1 + B2 + B3 + B4) <= 6
Also, the problem says that one should not assume all $1 million is necessarily invested, so one
cannot divide by $1,000,000.

3
The following description is for question 5.
Schmidt’s manufacturing firm uses control charts to monitor its process for making tablet cases. They
have subgroup size of n=4, overall mean 𝑋𝑋� = 29.9, and average range 𝑅𝑅� = 7.3. Using these data, the control
limits are as follows:

𝑋𝑋� UCL = 35.2, 𝑅𝑅 UCL = 16.6

𝑋𝑋� LCL = 24.6, 𝑅𝑅 LCL = 0
Sample Obs 1 Obs 2 Obs 3 Obs 4 𝑋𝑋� 𝑅𝑅
1 28.8 32.9 29.3 31.9 30.7 4.1
2 29.4 27.9 26.8 32.8 29.2 6.0
3 27.7 28.8 26.3 32.1 28.7 5.8
4 32.9 22.9 24.5 35.3 28.9 12.4
5 36.4 32.2 28.3 30.4 31.8 8.1

5. [2 points] Based on the above data, is the process in control? Explain your answer for full credit.

Yes, each value of X-bar is within the control limits for the 𝑋𝑋� chart and each value of R is within the
control limits for the R chart.

Note: Most students got this correct.

The following description is for questions 6-7.

Libby’s manufacturing tracks a key dimension of a component in its tractors. Suppose that the mean of
historical samples is 15.4 with a standard deviation of 4.1. Design specifications require that this quality
dimension should be in the range from 10.6 to 20.6 to be non-defective.

6. [1 point] What is the Cpk?

USL − µ µ − LSL 20.6 − 15.4 15.4 − 10.6

C pk =
min{ , } min{ = , } 0.390
3σ 3σ 3* 4.1 3* 4.1
Note: Most students got this correct.

7. [2 points] What is the probability of producing a non-defective unit?

USL = 20.6 LSL = 10.6

μ = 15.4, σ = 4.1
Defective above USL: Z > (20.6 – 15.4)/4.1 = 1.27
This gives a probability of 0.898, so 1-0.898 = 0.102 above USL.
Defective below LSL: Z < (10.6 – 15.4)/4.1 = -1.17
This gives a probability of 0.121 below LSL.
Probability non-defective = 1 – 0.102 – 0.121 = 77.7%

Note: Most students got this correct.

4
The following description is for questions 8-10.
Park Sports is an outdoor retailer with two stores in upstate NY. The company is planning inventory for
a particular type of rock climbing backpack. It buys this backpack from an overseas supplier for $60 each
and sells it in its stores for $180 each. All leftover stock at the end of the season is sold to an outlet
store for $45 each. Park Sports estimates that the estimated goodwill cost of being short, for each unit,
is $5. The lead time to buy merchandise from the supplier is long, so the newsvendor model is
applicable. Suppose that the demand for this backpack in each store is forecasted to have a normal
distribution with mean 300 and standard deviation 65.

8. [2 points] How much inventory should be ordered, for each store, to maximize the expected profit?

Cu = p – c + s = $180 - $60 + $5 = $125, Co = c - v = $60 - $45 = $15

Critical fractile = Cu / (Cu + Co) = 125 / 140 = 0.893
z = 1.25
Q = mean + z * sigma = 300 + 1.25*65 = 381 (382 if roundup) backpacks for each store

Note: Most students got this correct.

9. [1 point] One of the managers suggests that the company should consolidate the inventory for the
backpacks in its nearby distribution center (DC). Under this plan, the company would only keep
minimal merchandise in stores (assume zero) and quickly replenish stores from the DC when
needed. Assume that the cost of shipping merchandise from the DC to stores is negligible, and the
demand at the stores is unchanged and independent from one another. How much inventory
should the company keep in the DC to maximize expected profit?

z = 1.25 (the same as before), since the underage and overage costs are the same.
Q = 600 + 1.25 * 91.92 = 714 (715 if roundup).
Note: This result is due to risk pooling: standard deviation at each store is 65, so the pooled standard
deviation = sqrt[65^2 + 65^2] = 91.92
Note: We did an example of this in class, the GAP example, where we discussed how one can add
variances but not standard deviations.

5
The following description is for questions 8-10 (REPEATED).
Park Sports is an outdoor retailer with two stores in upstate NY. The company is planning inventory for
a particular type of rock climbing backpack. It buys this backpack from an overseas supplier for $60 each
and sells it in its stores for $180 each. All leftover stock at the end of the season is sold to an outlet
store for $45 each. Park Sports estimates that the goodwill cost of being short, for each unit, is $5. The
lead time to buy merchandise from the supplier is long, so the newsvendor model is applicable.
Suppose that the demand for this backpack in each store is forecasted to have a normal distribution
with mean 300 and standard deviation 65.

10. [2 points] Suppose Park Sports was unhappy with consolidating inventory at a single DC, and went
back to the traditional model of holding inventory at each store. Further, Park Sports ultimately
decided that it would be better to stock a number of backpacks equal to mean demand at each
store: 300. Given this, what is their expected fill rate at each store?

For each store:

Q = 300
z = (300-300)/65 = 0
L(z) for z=0 is L(z=0) = 0.3989
E[Lost Sales] = sigma*L(z) = 65*0.3989 = 25.93 units
E[Sales] = D – E[LS] = 300 – 25.93 = 274.07 units

Fill Rate = E[Sales]/E[D] = 274.07/300 = 91.36%

Fill Rate = 1 – E[Lost Sales]/E[D] = 1 – 25.93/300 = 91.36%

Note: Most students got this correct.

6
The following description is for questions 11-14.
Waldman Soda makes three varieties of kombucha high-end cola: Regular, Diet, and Nil. The factory
formulates the following linear program to determine how many cases of each type of cola to produce
in the current season to achieve maximum contribution dollars (fractional cases are acceptable).

Decision Variables
x: cases of Regular to produce
y: cases of Diet to produce
z: cases of Nil to produce

Linear Programming Formulation

Maximize 20x + 16y + 24z (dollars of contribution)
Subject to
4x + 2z ≤ 3000 (variety flavor A availability in pounds)
4y + 2z ≤ 2040 (variety flavor B availability in pounds)
x + 2z ≤ 800 (availability of sugar in lbs)
3x + y + 2z ≤ 1000 (man-hours of labor time available)
x, y, z ≥ 0

The sensitivity report obtained by running this program in Solver is below. Using this report, answer
the questions that follow.

Sensitivity Analysis Report from Solver

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$D$8 Cases Regular 0 -12 20 12 1E+30
$E$8 Cases Diet 346.7 0 16 12 4
$F$8 Cases Nil 326.7 0 24 8 6

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$G$11 Flavor A 653.3 0 3000 1E+30 2346.666667
$G$12 Flavor B 2040 1.3 2040 1960 440
$G$13 sugar 653.3 0 800 1E+30 146.6666667
$G$14 man hrs 1000 10.7 1000 110 490

7
 11. [1 point] What is the optimal objective function value (i.e. total contribution) in dollars?

0*20 + 346.7*16 + 326.7*24 = $13,388

Note: Most students got this correct.

For questions 12-14, state whether each of the following changes (treat each independently) causes the
optimal objective function value (i.e. total contribution) to increase, decrease, or stay the same, and by
how much. Alternatively, if you believe an answer is not obtainable with the available information, then
state that Solver must be re-run. Be as specific as possible.

12. [1 point] Suppose the number of labor man-hours decreases by 20 hrs, how does this affect the
optimal objective function?

Decrease of $10.7*20 = 214, because shadow price is 10.7 and 20 is within the allowable
decrease

Note: Most students got this correct. For full credit, you needed to have the number, 214, and also
specify that it will decrease.

13. [1 point] Suppose the price of Diet increases and its contribution goes up from $16 to $21 per case,
how does this affect the optimal objective function?

Increase of roughly $5*346.7 = $1734.

Note: Some students had trouble with this. The $5 increase is within the allowable increase, so the
same optimal solution remains, but the contribution increases by: ($21-$16)*346.7 = $1734.

14. [1 point] Suppose Waldman Soda is able to acquire an extra 100 pounds of Sugar at $0 cost, how
does this affect the optimal objective function?

No change, because the shadow price is zero and 100 is within the allowable increase.

Note: Most students got this correct.

8
 15. [1 point] Consider the supply chain as shown below:

Distributor’s Wholesale Retail Demand

Factory Distributor Wholesaler Retailer
Orders Orders Orders

Which of the following most closely represents the bullwhip effect in this supply chain (circle one)?

(a) Var (Distributor’s Orders) ≥ Var (Wholesale Orders) ≥ Var (Retail Orders) ≥ Var
(Demand)
(b) Var (Distributor’s Orders) ≤ Var (Wholesale Orders) ≤ Var (Retail Orders) ≤ Var (Demand)
(c) Var (Distributor’s Orders) ≤ Var (Wholesale Orders) ≤ Var (Retail Orders) ≥ Var (Demand)
(d) None of the above

16. [1 point] Suppose the critical fractile for a product, using the newsvendor model, is less than 0.5.
What happens to the optimal quantity as the standard deviation of demand decreases, holding
everything else constant (circle one)?

(a) Q* increases
(b) Q* decreases
(c) Q* stays the same
(d) Cannot say without more information

17. [1 point] Toyota uses the Andon system to (circle one):

(a) level or balance the production

(b) make mistakes known
(c) reduce setup times
(d) achieve just-in-time production
(e) manage relationships with suppliers

18. [1 point] Suppose a company carries an inventory of undyed (i.e. no color) jacket, and allow
customers to decide which color they want to purchase. At that time, the company would dye the
jacket the appropriate color and ship it to the customer within one week. What does this fulfillment
strategy most closely resemble (circle one)?

(a) Vendor Managed Inventory

(b) Delayed Differentiation
(c) Just in Time
(d) Toyota Production System
(e) Continuous Replenishment