Operation and Supply Chain ESLSCA University

Dr Muhammed Nafea MBA - Class ESL69H

Final Exam Yasser Ragab Sayed

Q4: GRIF’s Inventory Management

Q4: Solution
ABC Analysis

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Operation and Supply Chain ESLSCA University
Dr Muhammed Nafea MBA - Class ESL69H
Final Exam Yasser Ragab Sayed

Item Quantity Price Total Revenu Rank Re- Arr. Annual % Class
arrangement Items Demand
1 2,800 1,500 4,200,000 2 8,640,000 2 8,640,000 53.04% A
2 9,600 900 8,640,000 1 4,200,000 1 4,200,000 25.78% A
3 600 3,000 1,800,000 3 1,800,000 3 1,800,000 11.05% B
4 240 55 13,200 10 1,200,000 8 1,200,000 7.37% B
5 15,200 4 60,800 6 320,000 6 320,000 1.96% C
6 16,000 20 320,000 5 60,800 5 60,800 0.37% C
7 2,400 6 14,400 8 28,800 9 28,800 0.18% C
8 1,200 1000 1,200,000 4 14,400 7 14,400 0.09% C
9 120 240 28,800 7 13,920 10 13,920 0.09% C
10 1,160 12 13,920 9 13,200 4 13,200 0.08% C
16,291,120 16,291,120 100%

Items Classification
2-1 A-Class (High Importance)
3-8 B-Class (Medium Importance)
6 - 5 - 9 - 7 - 10 - 4 C-Class (Low Importance)

Amount Number of Items

Class Total Percent Total Percent

A 12,840,000 78.82% 2 20.00%
B 3,000,000 18.41% 2 20.00%
C 451,120 2.77% 6 60.00%

The A-Class items, constituting only 20% of the total number of items, contribute significantly to the total
value, representing 78.82% of the total amount. This emphasizes their high importance and impact on
the overall value of the inventory.

The B-Class items, comprising 20% of the total items, contribute 18.41% to the total value. While their
individual impact is moderate, they collectively contribute significantly to the overall inventory value.

The majority of items fall into the C-Class category, accounting for 60% of the total items but contributing
a relatively lower percentage (2.77%) to the total value. These items have lower individual value but still
make up a substantial portion of the inventory.

The classification and analysis enable prioritization of inventory management efforts, with a focus on
efficient control and optimization of A and B-Class items due to their higher individual and collective
impact.

20 | P a g e
Operation and Supply Chain ESLSCA University
Dr Muhammed Nafea MBA - Class ESL69H
Final Exam Yasser Ragab Sayed

The concentration of value in a smaller percentage of items (A and B-Class) suggests the potential for a
more focused and strategic approach to inventory management, emphasizing cost-effectiveness and risk
mitigation for the most critical items.

The presented data provides a valuable foundation for implementing an ABC analysis, a widely used
inventory management technique that allows businesses to allocate resources effectively based on the
importance of items in their inventory.

As a production Manager of GRIF

a) Which inventory model should be used here: the basic EOQ, the EPQ, or the single-
period model? How do you know?

In this scenario, the Economic Production Quantity (EPQ) model is most appropriate for
managing the inventory of the components produced by the machine. The EPQ model is
designed for situations where production and usage rates are not synchronized, which
seems to be the case here. Let's analyze the given information to understand why EPQ is
suitable:

x Continuous Production and Usage:

o The machine produces the component at a rate of 20 units a day,
indicating a continuous production process. However, only 8 units are
used daily in the assembly of the final product, indicating a continuous
but asynchronous usage pattern.
x Lead Time and Setup Time:
o The manager estimates that it will take almost a full day to get the
machine ready for a production run (setup time).
o This suggests that there is a lead time involved in preparing the
machine for production.
x Continuous Demand:
o Assembly takes place five days a week, 50 weeks a year, suggesting a
continuous demand for the component.
x Inventory Holding Costs:
o The inventory holding cost is provided at LE 10 per year, indicating that
there is a cost associated with holding excess inventory.
x EPQ Model Characteristics:
o The EPQ model is designed for situations where production and usage
rates are not synchronized, and there is a setup or ordering cost
associated with initiating a production run.

Given these factors, the EPQ model is appropriate as it considers the continuous production
of the component, the asynchronous usage pattern, and the setup cost associated with
initiating production runs. It aims to find the optimal production quantity that minimizes the
total cost, considering holding costs and setup costs. The basic Economic Order Quantity
(EOQ) model assumes synchronous production and usage, which is not the case here. The

21 | P a g e
Operation and Supply Chain ESLSCA University
Dr Muhammed Nafea MBA - Class ESL69H
Final Exam Yasser Ragab Sayed

Single Period Model is typically used for one-time or infrequent ordering situations, and it
may not be suitable for continuous production scenarios.

b) What run quantity should be used to minimize total annual costs?

Given
P (Production Rate) = 20 units/day
U (Usage Rate) = 8 units/day
H (Holding Cost) = EGP 10
S (Setup Cost) = EGP 300/run
Operating Days = 5 x 50 = 250 days
D = u x operating days = 8 x 250 = 2,000 units

To determine the run quantity that minimizes total annual costs using the Economic Production
Quantity (EPQ) model, we need to use the formula for EPQ:

EPQ = Q = 447 units/run, optimal production quantity that achieve minimal total cost

Number of Runs N = D/Q = 2000/447= 4.47 ~ 4 Runs

c) Calculate the Total Inventory Cost for this case.

The total inventory cost (THC) can be calculated using the following formula:
I MAX = (447/20) (20-8) = 268 units
Inventory Cost (THC) = Average Inventory Level * Holding cost = (268/2) * (10) = 1,340 LE

d) What is the length of a production run in days?

Run Time (Production Run) = Q/P = 447/20 = 22 days

Cycle time = Q/U = 447/8 = 55.8 days ~ 55 days

e) During production, at what rate will inventory buildup?

Inventory builds up at a rate equal to the difference between production and usage rates
= p-u = 20 – 8 = 12 Units

f) If the manager wants to run another job between the runs of this item, and needs a
minimum of 10 days per cycle for the other work, will there be enough time?

22 | P a g e
Operation and Supply Chain ESLSCA University
Dr Muhammed Nafea MBA - Class ESL69H
Final Exam Yasser Ragab Sayed

The job needs to be completed within the duration of pure consumption time for the
component in the new product. The conclusion of the pure consumption time is marked

by the depletion of the component inventory, reaching zero units. If the duration of the
other job exceeds the pure consumption time, it would result in a depletion of the
component inventory before the completion of the new product.

Cycle Time = Run Time + Machine Preparation Time + Pure Consumption Time

55 = 22 + 1 + Pure Consumption Time

Pure Consumption Time = 32 days

Conclusion: Yes, there will be enough time to run the other job because the other job requires
only 10 days.

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