CurrentCurrent PracticeMicrowave ModelABCDEFTotal$ Value500.00500.00500.00500.00500.00500.00Holding Cost Factor0.250.250.250.250.250.25Fixed Cost Per Order1000.001000.001000.001000.001000.001000.00Daily Demand:Average122288359744Std. Dev.171867192222Order Quantity p038981: p038981: Current practice is a 30 day supply = 30 * average daily demand3606602640105029101320Ship Time (days):Average777777Std. Dev.222222Production Time (days):Average303030303030Std. Dev.444444Lead Time (days):Average p038981: p038981: =Average ship time + average production time37.00Std. Dev. p038981: p038981: sqrt(sum of variances of ship time^2 + variance of production time^2) 4.47Demand during Lead Time:Average p038981: p038981: Average daily demand * average lead time444Std. Dev. p038981: SQRT((Average lead time * Standard deviation of daily demand^2)+(Average daily demand^2 * Standard deviation of Lead time^2)) 117Reorder Point p038981: p038981: Current practice is 51*average daily demand612Safety Stock Level Bret Kauffman: = Reorder point - average demand during lead time168Inventory Performance:Service Level p038981: We know that safety stock = z * standard deviation of demand during lead time therefore the z value = safety stock / standard deviation of demand during lead time once we know the z value, NORMSINV will give us the current level of customer service that IMI is providing for this model. This Service Level = NORMSDIST(safety stock / standard deviation of demand during lead time) 0.9254Calculation of Total CostPurchase Cost Bret Kauffman: Value of the microwave * number of microwaves sold (=average daily demand * 365)2,190,000Annual Holding Cost:Cycle Stock p038981: p038981: Holding cost factor * Price/unit * Average inventory remember average inventory = order quantity / 222,500Safety Stock p038981: p038981: Holding cost factor * value/unit * safety stock units p038981: p038981: Current practice is a 30 day supply = 30 * average daily demand21,000Anuual Fixed Order Cost p038981: p038981: Order cost = Fixed cost per order * (Annual demand / Order quantity) assume 365 days / year12,167Annual Total Cost p038981: p038981: Total cost = Purchase cost + ordering cost + holding cost p038981: p038981: =Average ship time + average production time p038981: p038981: sqrt(sum of variances of ship time^2 + variance of production time^2) p038981: p038981: Average daily demand * average lead time p038981: SQRT((Average lead time * Standard deviation of daily demand^2)+(Average daily demand^2 * Standard deviation of Lead time^2)) p038981: p038981: Current practice is 51*average daily demand Bret Kauffman: = Reorder point - average demand during lead time2,245,667 AnalysisEconomic Order Quantity and Safety StockSingle ModelMicrowave ModelABCDEFTotalX$ Value500.00500.00500.00500.00500.00500.00500.00Holding Cost Factor0.250.250.250.250.250.250.25Fixed Cost Per Order1000.001000.001000.001000.001000.001000.001000.00Daily Demand:Average122288359744Std.

1. CurrentCurrent PracticeMicrowave ModelABCDEFTotal$
Value500.00500.00500.00500.00500.00500.00Holding Cost
Factor0.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.00Daily
Demand:Average122288359744Std. Dev.171867192222Order
Quantity
p038981: p038981:
Current practice is a 30 day supply = 30 * average daily
demand3606602640105029101320Ship Time
(days):Average777777Std. Dev.222222Production Time
(days):Average303030303030Std. Dev.444444Lead Time
(days):Average
p038981: p038981:
=Average ship time + average production time37.00Std. Dev.
p038981: p038981:
sqrt(sum of variances of ship time^2 + variance of production
time^2)
4.47Demand during Lead Time:Average
p038981: p038981:
Average daily demand * average lead time444Std. Dev.
p038981: SQRT((Average lead time * Standard deviation of
daily demand^2)+(Average daily demand^2 * Standard
deviation of Lead time^2))
117Reorder Point
p038981: p038981:
Current practice is 51*average daily demand612Safety Stock
Level

2. Bret Kauffman: = Reorder point - average demand during lead
time168Inventory Performance:Service Level
p038981: We know that safety stock = z * standard deviation of
demand during lead time
therefore the z value = safety stock / standard deviation of
demand during lead time
once we know the z value, NORMSINV will give us the current
level of customer service that IMI is providing for this model.
This Service Level = NORMSDIST(safety stock / standard
deviation of demand during lead time)
0.9254Calculation of Total CostPurchase Cost
Bret Kauffman: Value of the microwave * number of
microwaves sold (=average daily demand *
365)2,190,000Annual Holding Cost:Cycle Stock
p038981: p038981:
Holding cost factor * Price/unit * Average inventory
remember average inventory = order quantity / 222,500Safety
Stock
p038981: p038981:
Holding cost factor * value/unit * safety stock units
p038981: p038981:
Current practice is a 30 day supply = 30 * average daily
demand21,000Anuual Fixed Order Cost
p038981: p038981:
Order cost = Fixed cost per order * (Annual demand / Order
quantity)
assume 365 days / year12,167Annual Total Cost

3. p038981: p038981:
Total cost = Purchase cost + ordering cost + holding cost
p038981: p038981:
=Average ship time + average production time
p038981: p038981:
sqrt(sum of variances of ship time^2 + variance of production
time^2)
p038981: p038981:
Average daily demand * average lead time
p038981: SQRT((Average lead time * Standard deviation of
daily demand^2)+(Average daily demand^2 * Standard
deviation of Lead time^2))
p038981: p038981:
Current practice is 51*average daily demand
Bret Kauffman: = Reorder point - average demand during lead
time2,245,667
AnalysisEconomic Order Quantity and Safety StockSingle
ModelMicrowave ModelABCDEFTotalX$
Value500.00500.00500.00500.00500.00500.00500.00Holding
Cost Factor0.250.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.001000.00Da
ily Demand:Average122288359744Std.
Dev.171867192222Order Quantity
p038981: p038981:
EOQ = SQRT(2*Annual demand * Fixed cost per order/ Holding
cost per unit of inventory)
remember Holding cost = holding cost factor * $value265Ship

4. Time (days):Average7777778
p038981: p038981:
one more day for site customizationStd. Dev.2222222Production
Time (days):Average30303030303030Std. Dev.4444444Lead
Time (days):Average37.00Std. Dev.4.47Demand during Lead
Time:Average444Std. Dev.117Desired Service
Level0.98000.98000.98000.98000.98000.98000.9800Reorder
Point
p038981: p038981:
Reorder point = average lead time demand + safety stock
Remember safety stock = z * std dev of lead time demand
And z = NORMSINV(desired service level)683
Bret Kauffman: Use standard Reorder point calculation as you
would for any of the other models
Safety Stock Level
Bret Kauffman: = Reorder point - average demand during lead
time239Inventory Performance:Service Level0.9800Calculation
of Total CostPurchase Cost
Bret Kauffman: Value of the microwave * number of
microwaves sold (=average daily demand *
365)2,190,000Annual Holding Cost:Cycle Stock
p038981: p038981:
Holding cost factor * Price/unit * Average inventory
remember average inventory = order quantity / 216,545Safety
Stock
p038981: p038981:
Holding cost factor * value/unit * safety stock units
p038981: p038981:

5. EOQ = SQRT(2*Annual demand * Fixed cost per order/ Holding
cost per unit of inventory)
remember Holding cost = holding cost factor *
$value29,909Anuual Fixed Order Cost
p038981: p038981:
Order cost = Fixed cost per order * (Annual demand / Order
quantity)
assume 365 days / year16,545Annual Total Cost
p038981: p038981:
Total cost = Purchase cost + ordering cost + holding cost
p038981: p038981:
Sum of all models
p038981: p038981:
SQRT(sum of squares of all model standard deviations)
Bret Kauffman: Use regular EOQ calculation as you would for
any of the models
p038981: p038981:
one more day for site customization
p038981: p038981:
Reorder point = average lead time demand + safety stock
Remember safety stock = z * std dev of lead time demand
And z = NORMSINV(desired service level)
Bret Kauffman: = Reorder point - average demand during lead
time2,252,999
Microwave Inventory Case
Intelligent Microwaves, Inc.

6. Intelligent Microwaves, Inc. (IMI) produces a wide range of
personal and commercial microwaves, including a heavy-duty
microwave oven for use in restaurants and other heavy use
environments. Their microwaves are considered to be very
reliable and have many “intelligent” features that customers
appreciate. Recently, however, competitive price pressures
have cut into IMI’s profit margins and they are taking a look at
their operations to try to find ways to reduce cost while
maintaining or improving product quality and customer service.
You have been asked to look at their production and distribution
of their heavy-duty microwave oven.
IMI actually produces 6 models of the heavy-duty microwave
but they are essentially the same except for the power supply
and the language of the instructions that are on the microwave.
These differentiating features result in the 6 models and are
necessary to meet the requirements of different overseas
customers. IMI has always produced each microwave model in
batches large enough to satisfy one month’s worth (30 days) of
average demand. Historical records indicate it takes them on
average 30 days, with a standard deviation of 4 days to produce
a batch and an average of 7 days, with a standard deviation of 2
days, to ship a batch of microwaves to the appropriate
warehouse in the appropriate country. There is a setup cost of
$1000 to get the production line prepared to produce any of the
heavy-duty models. One microwave of any model is valued at
$500. Through trial and error over the last few years, IMI has
found that using a reorder point of 51 days of supply (51 times
the average daily demand) has given them a reliable
performance, only running out of microwaves about 2% of the
time while waiting for a new shipment to arrive. IMI uses an
inventory carrying charge of $.25 per dollar of inventory per
year.
Intelligent Microwaves:

7. Production and Distribution of Heavy Duty Microwaves
6 models of Heavy Duty Microwaves
Produced in batches to satisfy one month’s (30 days) of average
demand
Production time – mean= 30 days, std dev = 4 days
Ship time – mean 7 days, std dev 2 days
Setup cost of $1000 to prepare the production line for any batch
= Order cost
Each microwave is valued at $500
Reorder point is 51 days of supply = 51 days * average daily
demand
Has yielded a 2% probability of stockout
Inventory carrying cost is $0.25/dollar of inventory
Key formulas
Lead time = Production time + Ship time
Demand during lead time = Lead time * Average daily demand
Std Dev of demand during lead time =>
Safety stock = Reorder point – Demand during lead time
Safety stock = z * std dev of demand during lead time thus`
Z = safety stock / std dev of demand during lead time
Service level = NORMDIST(z)
Total cost = Annual Purchase Cost + Annual Ordering Cost +
Annual Holding Cost
TC = DC + (D/Q)S + (Q/2 + SS)H where
(D=Demand, C=Cost/unit, Q = order qty, S=Order cost,
H=Holding cost, SS = Safety Stock)

8. A Based on the Microwave Inventory Case answers to the
following question in form of a report:
1. Calculate the current cost of IMI’s inventory practices using
the CURRENT tab of the template provided.
2. What would be the potential benefits of selecting both the
production batch sizes and the reorder points more
scientifically? Do this by completing columns B through H of
the ANALYSIS tab of the template provided. Using the
concepts of Economic Order Quantity and Reorder Point,
explain the difference between this model and IMI’s current
practice.
3. What if IMI was able to fully standardize the heavy-duty
model to the point where the language and power supply
customizing features could be added in a modular fashion
immediately before shipping to the warehouse that needs them?

9. You consulted with the production superintendent, who
indicated that this could be done, but that it would add one day
to the ship time to add these customizing features to the
standard microwave just prior to shipping.
Consider it this way. IMI maintains a warehouse right next to
their factory and they store inventory for models A, B, C, D, E,
and F. Therefore they have to maintain separate inventory for
each of the models. If they standardize to a single model, it
may take them a day to ship, but they only need to keep one
type of microwave in their warehouse.
For this part use the SINGLE MODEL column of the
ANALYSIS tab and consider the impact RISK POOLING has
should IMI combine all models. Using the inventory concepts
we discussed in class, explain to IMI why they might achieve
some cost benefit by embracing the idea of replacing all of their
models with a single model.
4. Assuming that you have now convinced IMI to standardize on
a single model of microwave, investigate other opportunities
that IMI may have to reduce costs or improve customer service.
Look at the components of total cost (not limited to
transportation time, order cost, supply or demand variability)
and make a recommendation to IMI on where else they may
want to focus their efforts. Justify your recommendations.
5. Perform a sensitivity analysis and evaluate potential
additional benefits focusing in Economic Order Quantity and
Safety Stock
6. On the spreadsheet add a column and consider:
· Reducing set-up times
· Reducing production or lead times?
· What about variances

10. B. Paper should be professionally structured, well-organized,
insightful, start with an executive overview, and conclude by
emphasizing the most important parts of the analysis.
Based on the spreadsheet summarized results and deliver in
form or report.
· what you have discovered
· Draw conclusions and summarize findings
· In what other areas might you invest?
(
)
2
2
2
2
D
L
L
D
LTD
m
s
m
s
s
×
+
×
=
Microwave ModelABCDEF
Daily Demand:
Average122288359744
Std. Dev.171867192222
CurrentMicrowave ModelABCDEFTotal$
Value500.00500.00500.00500.00500.00500.00Order

11. Quantity3606602640105029101320Reorder
Point61211224488178549472244Holding Cost
Factor0.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.00Daily
Demand:Average122288359744Std. Dev.171867192222Ship
Time (days):Average777777Std. Dev.222222Production Time
(days):Average303030303030Std. Dev.444444Lead Time
(days):Average37.0037.0037.0037.0037.0037.00Std.
Dev.4.474.474.474.474.474.47Demand during Lead
Time:Average4448143256129535891628Std.
Dev.117147567195454238Safety
Stock:Units16830812324901358616Safety Factor (Std.
Devs.)1.442.092.172.522.992.59Inventory Performance:Service
Level0.92540.98180.98520.99410.99860.99520.9800Annual
Holding Cost:Cycle
Stock22500412501650006562518187582500558750Safety
Stock21000385001540006125016975077000521500Total435007
97503190001268753516251595001080250Anuual Fixed Order
Cost12166.666666666712166.666666666712166.666666666712
166.666666666712166.666666666712166.666666666773000Ann
ual Total
Cost55666.666666666791916.6666666667331166.66666666713
9041.666666667363791.666666667171666.6666666671153250
p038981:
sqrt(sum of variances of ship time + production time)
p038981:
Average daily demand * average lead time
Order QuantityMicrowave ModelABCDEFTotal$
Value500.00500.00500.00500.00500.00500.00Order
Quantity265358717452753507Reorder
Point61211224488178549472244Holding Cost
Factor0.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.00Daily
Demand:Average122288359744Std. Dev.171867192222Ship
Time (days):Average777777Std. Dev.222222Production Time
(days):Average303030303030Std. Dev.444444Lead Time

12. (days):Average37.0037.0037.0037.0037.0037.00Std.
Dev.4.474.474.474.474.474.47Lead Time
Demand:Average4448143256129535891628Std.
Dev.117147567195454238Safety
Stock:Units16830812324901358616Safety Factor (Std.
Devs.)1.442.092.172.522.992.59Inventory Performance:Service
Level0.92540.98180.98520.99410.99860.99520.9800Annual
Holding Cost:Cycle
Stock16545.392107774322402.566817219944805.13363443972
8256.636388643347040.541025800331682.0138248818190732S
afety
Stock21000385001540006125016975077000521500Total37545.
392107774360902.5668172198198805.1336344489506.6363886
433216790.5410258108682.013824882712232Anuual Fixed
Order
Cost16545.392107774322402.566817219844805.133634439728
256.636388643347040.541025800331682.0138248818190732An
nual Total
Cost54090.784215548683305.1336344397243610.26726887911
7763.272777287263831.082051601140364.027649764902965
Safety StockMicrowave ModelABCDEFTotal$
Value500.00500.00500.00500.00500.00500.00Order
Quantity3606602640105029101320Desired Service
Level0.98000.98000.98000.98000.98000.9800Reorder
Point68311164420169545212117Holding Cost
Factor0.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.00Daily
Demand:Average122288359744Std. Dev.171867192222Ship
Time (days):Average777777Std. Dev.222222Production Time
(days):Average303030303030Std. Dev.444444Lead Time
(days):Average37.0037.0037.0037.0037.0037.00Std.
Dev.4.474.474.474.474.474.47Lead Time
Demand:Average4448143256129535891628Std.
Dev.117147567195454238Safety
Stock:Units2393021164400932489Safety Factor (Std.
Devs.)2.052.052.052.052.052.05Inventory Performance:Service

13. Level0.98000.98000.98000.98000.98000.98000.9800Annual
Holding Cost:Cycle
Stock22500412501650006562518187582500558750Safety
Stock29908.524580218437789.0938693328145442.4948139564
9949.3869522672116542.25500393961090.3588880882440722T
otal52408.524580218479039.0938693328310442.494813956115
574.386952267298417.255003939143590.358888088999472Anu
ual Fixed Order
Cost12166.666666666712166.666666666712166.666666666712
166.666666666712166.666666666712166.666666666773000Ann
ual Total
Cost64575.19124688591205.7605359995322609.161480623127
741.053618934310583.921670605155757.0255547551072472
OQ and SSMicrowave ModelABCDEFTotal$
Value500.00500.00500.00500.00500.00500.00Order
Quantity265358717452753507Desired Service
Level0.98000.98000.98000.98000.98000.9800Reorder
Point68311164420169545212117Holding Cost
Factor0.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.00Daily
Demand:Average122288359744Std. Dev.171867192222Ship
Time (days):Average777777Std. Dev.222222Production Time
(days):Average303030303030Std. Dev.444444Lead Time
(days):Average37.0037.0037.0037.0037.0037.00Std.
Dev.4.474.474.474.474.474.47Lead Time
Demand:Average4448143256129535891628Std.
Dev.117147567195454238Safety
Stock:Units2393021164400932489Safety Factor (Std.
Devs.)2.052.052.052.052.052.05Inventory Performance:Service
Level0.98000.98000.98000.98000.98000.98000.9800Annual
Holding Cost:Cycle
Stock16545.392107774322402.566817219944805.13363443972
8256.636388643347040.541025800331682.0138248818190732S
afety
Stock29908.524580218437789.0938693328145442.4948139564
9949.3869522672116542.25500393961090.3588880882440722T

14. otal46453.916687992760191.6606865527190247.628448396782
06.0233409105163582.79602973992772.37271297631454Anuua
l Fixed Order
Cost16545.392107774322402.566817219844805.133634439728
256.636388643347040.541025800331682.0138248818190732An
nual Total
Cost62999.30879576782594.2275037725235052.762082835106
462.659729554210623.337055539124454.386537852822187
StandardMicrowave ModelABCDEFStandard$
Value500.00500.00500.00500.00500.00500.00500.00Order
Quantity2653587174527535071319Desired Service
Level0.98000.98000.98000.98000.98000.98000.9800Reorder
Point6831116442016954521211714243Holding Cost
Factor0.250.250.250.250.250.250.25Fixed Cost Per
Order1000.001000.001000.001000.001000.001000.001000.00Da
ily Demand:Average122288359744298Std.
Dev.17186719222280.1935159474Ship Time
(days):Average7777778Std. Dev.2222222Production Time
(days):Average30303030303030Std. Dev.4444444Lead Time
(days):Average37.0037.0037.0037.0037.0037.0038.00Std.
Dev.4.474.474.474.474.474.474.47Lead Time
Demand:Average444814325612953589162811324Std.
Dev.1171475671954542381421Safety
Stock:Units23930211644009324892919Safety Factor (Std.
Devs.)2.052.052.052.052.052.052.05Inventory
Performance:Service
Level0.98000.98000.98000.98000.98000.98000.9800Annual
Holding Cost:Cycle
Stock16545.392107774322402.566817219944805.13363443972
8256.636388643347040.541025800331682.013824881882451Sa
fety
Stock29908.524580218437789.0938693328145442.4948139564
9949.3869522672116542.25500393961090.3588880882364907T
otal46453.916687992760191.6606865527190247.628448396782
06.0233409105163582.79602973992772.37271297447358Anuua
l Fixed Order

15. Cost16545.392107774322402.566817219844805.133634439728
256.636388643347040.541025800331682.013824881882451Ann
ual Total
Cost62999.30879576782594.2275037725235052.762082835106
462.659729554210623.337055539124454.386537852529808
p038981:
one more day for site customization