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Inventory Management Study Guide

1)Know the purposes of inventory.

1)Know the purposes of inventory.

2)A milk delivery truck stops by a grocery store each morning to fill orders.  If the required restocking level is 120 gallons and this morning’s inventory is only 50 gallons, what should today’s order quantity be? 

3)The manager of the grocery store in question 2 believes the restocking level isn’t correct based on how frequently the store runs out of milk.  The manager wants milk to be in stock 99% of the time.  The average daily demand for milk is 100 gallons per day with a standard deviation of 25 gallons.  Assume lead time is zero.  

a.What should the restocking level be?
b.What service level is being achieved at the 120 gallon restocking point?

4)In a continuous review system with constant demand, the annual demand is 30,000 units and the lead time is 5 days.  Assuming 365 days per year, at what inventory level should the order be placed? 

5)Annual demand at a local retailer for a brand of toothpaste is 75,000 tubes.  One tube costs $5 and the company estimates its annual holding cost for a tube is 30% of its product cost.  The retailer’s cost to place an order is $40 per order.

a.What is the economic order quantity?

b.How many orders will be placed in one year?

c.What are the annual holding costs?

d.What are the annual ordering costs?

6)Using the information in problem 5, if the manufacturer offers the following price discounts, what order quantity will yield the lowest total cost?


7) A local chicken restaurant has an average demand of 24 chickens/day with a standard deviation of 4 chickens.  The lead time from when the order is placed to delivery at the restaurant has averaged 3 days with a standard deviation of 0.5 days.  If the restaurant manager wants to keep a safety stock of 12 chickens, at what inventory level should the next order be placed?

8) A baker makes apple pies for the local famer’s market each week.  The demand averages 115 pies with a standard deviation of 18 pies.  Pies cost $1.91 each to make and sell at the farmer’s market for $6.00 each.  Any pies that aren’t sold at the farmer’s market can be sold to a nearby bakery for $1 per pie.  It costs $0.06 per pie to transport them to the nearby bakery.

a.What percent of the time will the baker have enough pies for the customers at the farmer’s market?

b.What percent of the time will the baker run out of pies for the customers?

c.What is the z-score to achieve the service level from part a?

d.How many pies should the baker take to the farmer’s market to maximize profit?

9)A product has a monthly demand of 10,000 units.  Orders are placed for 5,000 units at a time.  The product costs $15 and management requires a safety stock of 4,000 units to be held.  What is the COGS?  What is the average inventory for this product?  What is the annual inventory turn for this product?

10)Know how to apply the Pareto principle for managing inventory.

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