Sample Questions

Q1: The demand requirements for a firm in the next four weeks are given in the following table.
The only relevant costs the firm faces are inventory carrying costs and ordering costs. The
ordering cost for every order placed is $200, while the inventory carrying cost is $2.5 per unit
per period. Calculate the order sizes that will minimize the overall costs. (Assume there is no
capacity restriction). Also compute the total costs for such an ordering policy.
Week
Demand

1
77

2
85

3
100

4
71

Q2: The firm ABC Pvt. Ltd. received a contract from a retail giant under a service level
agreement of 95%. The mean demand is 200 per week and the weekly standard deviation of
demand is 25. If the lead time of production is 3 weeks, calculate the safety stock levels that
ABC Pvt. Ltd. must maintain to honor the service level. [Use P (Z<1.645) =0.95 where Z is the
standard normal random variable]
Q3: A newspaper vendor has only one chance of placing an order on a given day. He purchases
the newspapers from a vendor at the rate of $2 per unit and sells them at $3.5 per unit. Further, at
the end of the day, the leftover can be sold to a junk dealer at the rate of $0.5 per unit. He knows
the probability distribution of sales of newspapers given by the following table:
Demand
25
26
27
28
29
30
Probability 0.1
0.15
0.25
0.3
0.15
0.05
How much should the newsvendor order to maximize his expected profits? Also calculate the
expected profit.
Q4: A firm has been following simple moving average to forecast demand. Currently, they are
able to achieve a MAPE of 23%. However, the industry average has been 15%-18% over the past
5 years. Hence, the pressure is on the management to improve their demand forecast. A business
school intern was hired for the same purpose. His goal is to improve their demand forecast by
making the MAPE fall below 15%. If he is able to achieve the same, then his internship will be
converted to a job offer. The intern, after going through a basic course in forecasting, took up the
challenge to improve the forecast accuracy. He uses simple exponential smoothing model for his
purpose. He divided the entire data set of past demand values into two parts, in the ratio of 6:1.
The first part will be called training dataset and the second one will be called testing dataset.
Based on the training dataset, he calculated the optimal value of which comes out to be 0.75.
The last period of the training data set have the following values: Actual demand- 890;
Forecasted demand- 925. The testing data set has 6 data points, which are 915, 875, 900, 925,
930 and 895. Calculate the MAPE for intern on the testing data set using the optimal value of
found from the training data set and decide whether the intern will be given the final job offer.

Q5: A firm predicted the demand for next six months as given in the following table
Months
Demand

Jan
350

Feb
490

Mar
185

Apr
375

May
230

Jun
300

The firm will have a policy of not firing its employees in the next six months. Whenever, there is
an upside/downside in the demand that will have to be met by either inventory/backordering or
subcontracting. Further, not more than 50 units can be subcontracted in any months. There is an
upper limit on the production for any month, which is 400 and the beginning inventory is 0. The
only relevant costs are given below:
Backorder cost
Inventory Holding Cost
Subcontracting cost

7/unit/month
3/unit/month
10/unit/month

If X1, X2, .., X6 be the production quantities in each month, D1, D2, , D6 be the demand in each
month, I1, I2, , I6 be the inventory kept in each month, B 1, B2, , B6 be the amount of
backorders in each month and S 1, S2, , S6 be the amount subcontracted in each month, then
write down the inventory balance equation for the month of April and June.
Also find the solution that will minimize overall costs.