M451 Supply Chain Management- Tutorial 2 Solution Dr Banafsheh Khosravi Continuous rate EOQ model & EOQ model with backorders & EOQ model with safety stock 1) a) The optimal production run size is the optimal number of units which is produced during each production run in a continuous rate EOQ model and it is shown by Q*. b) 2) a) The optimal production run size: Maximum inventory level = The maximum inventory level is less than the maximum capacity, so Q* is accepted. b) Number of days = 37500 / 400 = 93.75 days/year 3) If the company buys the product: Ch = £2.5, D = 3000, Co =£4 If the company makes the product: Ch= £2.30, R = 8000, Co =£50, D = 3000 Optimal run size: Thus, the company should make instead of buying the product. 4)a) The optimal strategy: b) We need to calculate M* to calculate maximum shortage: Maximum shortage : S* = Q* – M* = 10 cars 5) a) The optimal order size, reorder point and safety stock are calculated as below: The service level is 99% so z = 2.33 . b) In this problem, demand is a random variable normally distributed with a given standard distribution and there is a non-zero lead time to receive each order. Inventory can be depleted at slower or faster rate during lead time. Stockout occurs if demand during lead time exceeds the reorder point. Therefore, due to uncertainty in demand, store needs to keep safety stock in order to buffer against uncertainty and keep the probability of occurrences of shortages low.
