# MSCI432 Lecture Notes - Carrying Cost, Msci, Safety Stock

MSCI 432/633: Production and Service Operations Management, Winter 2010

MSCI 432.001/633: Assignment # 3; MSCI 432.002: Assignment # 2

Q1. Discounting schemes.

a. Find the optimal ordering quantities for each of the items and the corresponding annual total cost.

[3 marks X3]

b. What is the primary difference between the ordering decisions made in a? Illustrate your answer

graphically. [2 marks]

Q2. Limit on shelf life.

Simply find T

EOQ

=EOQ/ߣ and if T

EOQ

>SL then Q

SL

=SL*λ

Q3. Uncertain demand.

a. Assume that the firm has centralized all inventories in a single warehouse and that the probability

of stocking out in a cycle can still be no more than 5%. Ideally, how much average inventory can

the company now expect to hold, and at what cost? In this case, how long will a unit spend in the

warehouse before being sold? [5 marks]

## Document Summary

Msci 432/633: production and service operations management, winter 2010. Msci 432. 001/633: assignment # 3; msci 432. 002: assignment # 2. Discounting schemes: find the optimal ordering quantities for each of the items and the corresponding annual total cost. Simply find teoq=eoq/ and if teoq>sl then qsl=sl* . Uncertain demand: assume that the firm has centralized all inventories in a single warehouse and that the probability of stocking out in a cycle can still be no more than 5%. Solution: (since pipeline inventory is not influenced, we do not include it in the calculations below. ) (a) To determine the optimal order quantity, we will use the eoq formula. H = * 25%/yr = . 5/yr, d = 10,000 /wk, (i. e. , annual demand, d = 500,000/yr), and s = Average inventory at each warehouse (i) = q/2 + ss = (20,000/2) + 3,300 = 13,300 units. Average inventory holding cost per warehouse = h*i = . 5*13,300 = ,250.