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PART II: CASE STUDY N° 2: Procurement at Betapharm. 20 MARKS

Conduct a brief analysis and respond the following:

1. Briefly and concisely explain the concept of “total cost of owning” according to the sourcing group of the company. 10 marks

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2. From a Supply Chain Management perspective, describe and analyze the importance of the “Prequalification Process” for Betapharm. Which attributes are evaluated? What are the benefits for the company? 10 marks

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PART III: PRACTICAL QUESTIONS 50 MARKS

Determine the reorder point that minimizes the inventory costs.

1. Consider an economic order quantity case where annual demand D = 1,000 units, economic order quantity Q = 200 units, the desired probability of not stocking out P = 0.95, the standard deviation of demand during lead time = 25 units, and lead time L = 15 days. Determine the reorder point. Assume that demand is over a 250-workday year.

10 marks

SOLUTION

d = 1000 / 250 = 4, and lead time is 15 days.

We use the equation

R = _ d L + z[pic 2]L = 4(15) + z(25)

In this case, z is 1.64. Completing the solution for R , we have

R = 4(15) + 1.64(25) = 60 + 41 = 101 units

This says that when the stock on hand gets down to 101 units, order 200 more.

Determine the EOQ and reorder point according to a desired level of availability of the product.

2. Daily demand for a certain product is normally distributed with a mean of 60 and standard deviation of 7. The source of supply is reliable and maintains a constant lead time of six days. The cost of placing the order is $10 and annual holding costs are $0.50 per unit. There are no stock-out costs, and unfilled orders are filled as soon as the order arrives. Assume sales occur over the entire 365 days of the year. Find the order quantity and reorder point to satisfy a 95 percent probability of not stocking out during the lead time. 10 marks

SOLUTION

In this problem we need to calculate the order quantity Q as well as the reorder point R.

d = 60 S = $10 [pic 3]d = 7 H = $0.50 D = 60(365) L = 6

The optimal order quantity is Qopt = √2DS/H = √2(60)365(10)/0.50 = √876,000

= 936 units

To compute the reorder point, we need to calculate the amount of product used during the lead time and add this to the safety stock.

The standard deviation of demand during the lead time of six days is calculated from the variance of the individual days. Because each day’s demand is independent,

[pic 4]L = √Σ i=1 L [pic 5]d 2 = √6(7 ) 2 = 17.15

Once again, z is 1.64.

R = d L + z[pic 6]L = 60(6) + 1.64(17.15) = 388 units

To summarize the policy derived in this example, an order for 936 units is placed whenever the number of units remaining in inventory drops to 388.

Determine the ideal number of units according to the P model, established by the company as a policy to follow.

3. A company currently has 200 units of a product on hand that it orders every two weeks when the salesperson visits the premises. Demand for the product averages 20 units per day with a standard deviation of 5 units. Lead time for the product to arrive is seven days. Management has a goal of a 95 percent probability of not stocking out for this product. The salesperson is due to come in late this afternoon when 180 units are left in stock (assuming that 20 are sold today). How many units should be ordered?

10 marks

SOLUTION:

Given I = 180, T = 14, L = 7, d = 20

[pic 7](T +L) = √ 21(5) 2 = 23 z = 1.64

q = d (T + L) + z[pic 8](T +L) − I = 20(14 + 7) + 1.64(23) − 180

q = 278 units

Apply the concepts that interrelate the MPS and MRP

4. A Company produces products A and T. The master production schedule for products A and T for the following 11 weeks is shown below.

Product

MPS (units) in week

1

2

3