E1 234 SUPPLY CHAIN MANAGEMENT : Problem Set 3

1. A certain company makes a complete line of IC chips. These chips are supplied directly to the customers from the factory warehouse. The chips are made in lots . The demad rate for the chips is 500 per week and the fixed cost of setup for each production run is 20 units. The production rate per week is 2000 IC chips. The inventory holding cost is 1 per unit per week. Two days are required from the time that a production acquisition is received at the factory until IC chips begin to come off the factory. The delivery time from the factory to the warehouse is 1 day. Determine the optimal batch size, average cost per week, and reorder point under the following two cases:

(a) Production rate is infinity

(b) Production rate = 2000 per week

2. In the above problem , assume that the actual demand is 1000 chips per week (100 percent forecasting error). How much would the average cost per week change because of this forecasting error. What is the new optimal lot size for the actual demand. Work out these for both cases (a) and (b).

3. Consider Problem 1 again, but with infinite production rate.
Assume that we can only place reorders on a power-of-two multiples of 1
day (ie. 1 day, 2 days, 4 days, 8 days, etc.). What is the least
cost reorder interval for under this restriction. How much does this add
to the total cost.

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