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Practice Problem 1: Partial Foods | Week 5 Practice Problems | CTL.SC1x Courseware | edX

MITx: CTL.SC1x Supply Chain Fundamentals

Week 5: Inventory Management I - Deterministic Demand > Week 5 Practice

Problems > Practice Problem 1: Partial Foods

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Course
Overview &
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Entrance
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Week 1:
Overview of
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Management &
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Week 2:
Forecasting I Introduction
Week 3:
Forecasting II Exponential
Smoothing

PRACTICE PROBLEM 1: PARTIAL FOODS

You are responsible for managing the inventory for the trendy upscale
specialty food store, Partial Foods. You are trying to set the inventory
policy for one of your most popular cheeses, Mad Cow Cheddar, which
comes in 1 pound wheels. It is a stable selling cheese with an average
weekly demand of 14 wheels/week.
Your fixed cost of placing an order from the farm that produces Mad Cow
Cheddar is $90/order and the cheese itself costs you $12.50 per wheel.
Assume that there are 52 weeks in a year and that the annual inventory
holding charge is 20%.

Part 1
What should your economic order quantity be, in wheels? Round to the
nearest integer value.

Answer: 229

Week 4:
Forecasting III Special Cases &
Extensions

Week 5:

Inventory
Management I
- Deterministic
Demand
Welcome to Week
5

EXPLANATION

We know that = $90/order and Demand = 14 wheels/week * 52

weeks = 728 wheels/year and
= 12.50*0.20 = 2.50 $/wheel/year.
= 228.94 ~ 229 wheels/order.

You have used 3 of 3 submissions

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Practice Problem 1: Partial Foods | Week 5 Practice Problems | CTL.SC1x Courseware | edX

Lesson 1:
Introduction to
Inventory
Management
Lesson 2:
Economic Order
Quantity

Part 2
Under this ordering policy, how many weeks on average will the Mad Cow
Cheddar be on your shelf? Round to the nearest integer value.

Answer: 8

Lesson 3:
Extensions to the
EOQ Model
Economic Order
Quantity
Recitation
Week 5 Practice
Problems
Supplemental
Material for
MicroMasters
Week 5 Graded
Assignment

EXPLANATION

To determine how long on average the cheese will sit on the shelf, we
need to know the order cycle length, T*, from this policy. T* = Q*/D =
229/728 = 0.314 year = 16.3 weeks. Since our demand is assumed to
be uniform and constant (assumptions of the EOQ), then the average
time is simply T*/2 = 8.16 ~ 8 weeks.
I do not know what kind of cheese you like, but that seems like a long
time!

Homework due Mar

23, 2016 at 19:00 UTC

You have used 3 of 3 submissions

Part 3
Your manager tells you that you cannot simply use all of the shelf space
you want for free. There is an opportunity cost for shelf space at Partial
Foods of $10/sqft/week and each wheel of Mad Cow Cheddar occupies
0.15 sqft of space.
What should your economic order quantity, in wheels, be now? Round to
the nearest integer value.

Answer: 40

EXPLANATION

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Practice Problem 1: Partial Foods | Week 5 Practice Problems | CTL.SC1x Courseware | edX

We now have an additional variable cost, that of space. The original

information has not changed: = $90/order and D = 728
wheels/year. However,
+ $10/sqft/week * 52 weeks * 0.15
sqft/wheel = 2.50 + 78 = 80.50 $/wheel/year.
= 40.34 ~ 40 wheels/order.
At this order rate, the average shelf life = (40/728/2) = 0.0274 years =
1.42 weeks. This is a little better!

You have used 3 of 3 submissions

Part 4
Your manager still thinks you order too much cheese and has limited your
shelf space to a maximum of 3 square feet. There is not back room, so all
of your Mad Cow Cheese wheels need to fit within that space.
What should your economic order quantity, in wheels, be now? Round to
the nearest integer value.

Answer: 20

EXPLANATION

This means your order quantity cannot exceed 3 square feet. You can
fit 3 / 0.15 = 20 wheels of Mad Cow Cheddar in this space. Therefore,
that is your order quantity. This is essentially a constrained problem
now.
We could figure out how much more this is going to cost by using the
EOQ sensitivity ratio.

= 1.25 or 25% more expensive!

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Practice Problem 1: Partial Foods | Week 5 Practice Problems | CTL.SC1x Courseware | edX

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