MID-TERM EXAM - Major: SCMinERP

(LAST SEMESTER 2024)

CASE 1 – The Versatech Corporation

The Versatech Corporation has decided to produce three new products. Five branch plants now
have excess product capacity. The unit manufacturing cost of the first product would be $29, $28,
$32, $29 and $31 in plants 1, 2, 3, 4, and 5, respectively. The unit manufacturing cost of the second
product would be $43, $42, $46, $41, and $45 in plants 1, 2, 3, 4, and 5, respectively. The unit
manufacturing cost of the third product would be $48, $35, and $30 in plants 1, 2, and 3,
respectively, whereas plants 4 and 5 do not have the capability for producing this product. Sales
forecasts indicate that 600, 1000, and 800 units of products 1, 2, and 3, respectively, should be
produced per day. Plants 1, 2, 3, 4, and 5 have the capacity to produce 400, 600, 400, 600, and
1,000 units daily, respectively, regardless of the product or combinations of products involved.
Assume that any plant having the capability and capacity to produce them can produce any
combination of the products in any quantity.
a. Management wishes to know how to allocate the new products to the plants to minimize
total manufacturing cost. Formulate and solve a spreadsheet model for this problem.
b. Suppose that the sales forecasts have been revised downward to 950, 320, and 550 units
per day of products 1, 2, and 3, respectively. Thus, each plant now has the capacity to produce all
that is required of any one product. Therefore, management has decided that each new product
should be assigned to only one plant and that no plant should be assigned more than one product
(so that three plants are each to be assigned one product, and two plants are to be assigned none).
The objective is to make these assignments so as to minimize the total cost of producing these
amounts of the three products. Formulate and solve a spreadsheet model for this problem.

CASE 2 – Brushing up on Inventory Control

Robert Gates rounds the corner of the street and smiles when he sees his wife pruning rose
bushes in their front yard. He slowly pulls his car into the driveway, turns off the engine, and falls
into his wife’s open arms. “How was your day?” she asks.
 “Great! The drugstore business could not be better!” Robert replies. “Except for the traffic
coming home from work! That traffic can drive a sane man crazy! I am so tense right now. I think
I will go inside and make myself a relaxing martini.”
Robert enters the house and walks directly into the kitchen. He sees the mail on the kitchen
counter and begins flipping through the various bills and advertisements until he comes across the
new issue of OR/MS Today. He prepares his drink, grabs the magazine, treads into the living room,
and settles comfortably into his recliner. He has all that he wants —except for one thing. He sees
the remote control lying on the top of the television. He sets his drink and magazine on the coffee
table and reaches for the remote control. Now, with the remote control in one hand, the magazine
in the other, and the drink on the table near him, Robert is finally the master of his domain. Robert
turns on the television and flips the channels until he finds the local news. He then opens the
magazine and begins reading an article about scientific inventory management. Occasionally he
glances at the television to learn the latest in business, weather, and sports. As Robert delves deeper
into the article, he becomes distracted by a commercial on television about toothbrushes. His pulse
quickens slightly in fear because the commercial for Totalee toothbrushes reminds him of the
dentist. The commercial concludes that the customer should buy a Totalee toothbrush because the
toothbrush is Totalee revolutionary and Totalee effective. It certainly is effective; it is the most
popular toothbrush on the market!
At that moment, with the inventory article and the toothbrush commercial fresh in his mind,
Robert experiences a flash of brilliance. He knows how to control the inventory of Totalee
toothbrushes at Nightingale Drugstore!
As the inventory control manager at Nightingale Drugstore, Robert has been experiencing
problems keeping Totalee toothbrushes in stock. He has discovered that customers are very loyal
to the Totalee brand name since Totalee holds a patent on the toothbrush endorsed by nine out of
10 dentists. Customers are willing to wait for the toothbrushes to arrive at Nightingale Drugstore
since the drugstore sells the toothbrushes for twenty percent less than other local stores. This
demand for the toothbrushes at Nightingale means that the drugstore is often out of Totalee
toothbrushes. The store is able to receive a shipment of toothbrushes several hours after an order
is placed to the Totalee regional warehouse because the warehouse is only twenty miles away from
the store. Nevertheless, the current inventory situation causes problems because numerous
emergency orders cost the store unnecessary time and paperwork and because customers become
disgruntled when they must return to the store later in the day.
Robert now knows a way to prevent the inventory problems through scientific inventory
management! He grabs his coat and car keys and rushes out of the house. As he runs to the car, his
wife yells, “Honey, where are you going?”
“I’m sorry, darling,” Robert yells back. “I have just discovered a way to control the
inventory of a critical item at the drugstore. I am really excited because I am able to apply my
management science degree to my job! I need to get the data from the store and work out the new
inventory policy! I will be back before dinner!”
Because rush hour traffic has dissipated, the drive to the drugstore takes Robert no time at
all. He unlocks the darkened store and heads directly to his office where he rummages through file
cabinets to find demand and cost data for Totalee toothbrushes over the past year. Aha! Just as he
suspected! The demand data for the toothbrushes is almost constant across the months. Whether
in winter or summer, customers have teeth to brush, and they need toothbrushes. Since a toothbrush
will wear out after a few months of use, customers will always return to buy another toothbrush.
The demand data shows that Nightingale Drugstore customers purchase an average of 250 Totalee
toothbrushes per month.
After examining the demand data, Robert investigates the cost data. Because Nightingale
Drugstore is such a good customer, Totalee charges its lowest wholesale price of only $1.25 per
toothbrush. Robert spends about 20 minutes to place each order with Totalee. His salary and
benefits add up to $18.75 per hour. The annual holding cost for the inventory is 12 percent of the
capital tied up in the inventory of Totalee toothbrushes.
a. Robert decides to create an inventory policy that normally fulfills all demand since he
believes that stock-outs are just not worth the hassle of calming customers or the risk of losing
future business. He therefore does not allow any planned shortages. Since Nightingale Drugstore
receives an order several hours after it is placed, Robert makes the simplifying assumption that
delivery is instantaneous. What is the optimal inventory policy under these conditions? How many
Totalee toothbrushes should Robert order each time and how frequently? What is the total variable
inventory cost per year with this policy?
b. Totalee has been experiencing financial problems because the company has lost money
trying to branch into producing other personal hygiene products, such as hairbrushes and dental
floss. The company has therefore decided to close the warehouse located twenty miles from
Nightingale Drugstore. The drugstore must now place orders with a warehouse located 350 miles
away and must wait five days after it places an order to receive the shipment. Given this new lead
time, how many Totalee toothbrushes should Robert order each time, and when should he order?
c. Robert begins to wonder whether he would save money if he allows planned shortages
to occur. Customers would wait to buy the toothbrushes from Nightingale since they have high
brand loyalty and since Nightingale sells the toothbrushes for less. Even though customers would
wait to purchase the Totalee toothbrush from Nightingale, they would become unhappy with the
prospect of having to return to the store again for the product. Robert decides that he needs to place
a dollar value on the negative ramifications from shortages. He knows that an employee would
have to calm each disgruntled customer and track down the delivery date for a new shipment of
Totalee toothbrushes. He estimates that an employee would spend an average of 5 minutes with
each customer who wishes to purchase a toothbrush when none are currently available, and
Nightingale employees are currently paid $8.40 per hour. Robert also believes that customers
would become upset with the inconvenience of shopping at Nightingale and would perhaps begin
looking for another store providing better service. He estimates the costs of losing customer
goodwill and future sales as $1.50 per unit short per year. Given the five-day lead time and the
shortage allowance, how many Totalee toothbrushes should Robert order each time, and when
should he order? What is the maximum shortage under this optimal inventory policy? What is the
total variable inventory cost per year?
d. Robert realizes that his estimate for the shortage cost is simply that — an estimate. He
realizes that employees could spend an average of anywhere from 3 minutes to 10 minutes with
each customer who wishes to purchase a toothbrush when none are currently available. He also
realizes that the cost of losing customer goodwill and future sales could range from $0 to $20 per
unit short per year. What effect would changing the estimate of the unit shortage cost have on the
inventory policy and total variable inventory cost per year found in part c?
e. Closing warehouses has not improved Totalee’s bottom line significantly, so the
company has decided to institute a discount policy to encourage more sales. Totalee will charge
$1.25 per toothbrush for any order of up to 500 toothbrushes, $1.15 per toothbrush for orders of
more than 500 but less than 1,000 toothbrushes, and $1 per toothbrush for orders of 1,000
toothbrushes or more. Robert still assumes a five-day lead time, but he does not want planned
shortages to occur. Under the new discount policy, how many Totalee toothbrushes should Robert
order each time, and when should he order? What is the total inventory cost (including purchase
costs) per year?