THE UNIVERSITY OF HONG KONG

B.ENG. LEVEL I EXAMINATIONS

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING

FUNDAMENTALS OF BUSINESS LOGISTICS (IMSE1016)

Answer FOUR questions only. ALL questions carry EQUAL marks.

Use of Electronic Calculators:

“Only approved calculators as announced by the Examinations Secretary can be used in this
examination. It is candidates’ responsibility to ensure that their calculator operates
satisfactorily, and candidates must record the name and type of the calculator used on the
front page of the examination script.”

Question 1

(a) What are the common types of inventories found in a supply channel? Discuss the
reasons for carrying the inventories. (10 marks)

(b) Demand for Lite Cola at a supermarket is 1000 cases a month. The supermarket
incurs a fixed cost of $500 each time an order is placed. The purchase cost of each
case is $100 and the annual holding rate is 20%.
(i) Determine the sum of annual ordering cost and annual holding cost if the
supermarket orders Lite Cola every month. (7 marks)

(ii) Determine the annual ordering frequency of Lite Cola that minimizes the sum
of annual ordering cost and annual holding cost and find the corresponding
minimum total cost. (8 marks)

Question 2
(a) In most companies, logisticians are responsible for coordinating the entire supply
chain rather than serving as local logistics activity administrators. Discuss how
logisticians can make contribution to the integration of production and marketing
departments and identify the typical interface activities that logisticians need to
manage together with their colleagues in those departments.
(10 marks)

(b) Total cost concept and differentiated distribution are two effective concepts for
logistics strategy formulation. Use an example to explain each of them. (7
marks)

(c) Traditional classification divides products into convenience, shopping, specialty and
industrial products. Discuss the common purchasing behavior of the customers and
the typical characteristics of the distribution systems for the four product types.
(8 marks)
Question 3
(a) A pharmaceutical company is conducting a review on its distribution system for US
market. Currently, all drugs produced are distributed to customers through its regional
warehouses. The logistics manager of the company has proposed to deliver drugs with
high sales volume directly to its customers and the remaining low-volume drugs
distributed through the warehouses. The 80-20 rule is used to partition the ten drugs
produced in its current production line into high-volume group (class A) and low-
volume group (classes B and C). The following table shows the relevant data of the
drugs for its US market.
Drug item code Annual sales revenue ($) Turnover ratio
101 20900 4
096 9900 4
981 12200 4
399 13900 4
877 95800 10
723 28800 4
892 40000 4
763 70100 7
613 72400 7
575 91700 10

(i) Using 20 percent of the items as the break point for determining the class A
items, determine the drugs that should be delivered directly to customers and
the average inventory value of each drug.
(8 marks)

(ii) Suppose that the company is planning to set up another production line in Asia
to sell the ten drugs to the Asia market. On the basis of a recent marketing
survey, the marketing department has found that the projected ranking of
annual sales of the ten drugs is the same as that of the US market and the
annual total sales revenue for the drugs is $200,000. Assuming that 20% of the
top-selling items in Asia contributes to 75% of total sales revenue, estimate
the annual demand for individual drugs.
(9 marks)

(b) Zone pricing, uniform pricing and freight equalization pricing are three common
geographic pricing methods. Discuss their rationales and characteristics. (8 marks)

Question 4
(a) Discuss the major functions of an order management system, warehouse management
system and transportation management system. (9 marks)

(b) Discuss the importance of an effective transportation system to economic activities.

(5 marks)

(c) A local parcel express delivery company has a service guarantee that parcels picked
up from its customers are to be delivered in 2 hours to the requested locations. Any
 delivery completed 15 minutes later than the two-hour guarantee incurs a penalty of
$10 off the delivery bill. Delivery costs are estimated at $5, but decline at the rate of
$2 for each 5 minutes later than the 2-hour guarantee.

(i) Model the cost penalty using Taguchi loss function. (4 marks)

(ii) Determine the optimal variation that should be allowed in the delivery service.
(7
marks)

Question 5
(a) A trucking company wishes to ship an urgent shipment from city A to city J within 15
hours, as specified in the contract with its customer, over the highway network shown
in the following diagram. If the shipment reaches city J later than the time specified in
the contract, the company has to pay a penalty of $1,000 for each hour overdue.

4.5 4
B E 4
A I
7 3.5 6
6.5 6.5
C 4.5
17.5 F 3
H
8
6.5 2.5 6.5
D 2.5
G 7.5 J

The figures given in the above diagram are estimated travelling times between cities
in hours.

Determine the shortest route from city A to city J and the amount of penalty.
(12
marks)

(b) A battery supplier sells its products to a computer manufacturing company. The
company consumes the batteries at a fairly steady rate of 10,000 units a year. It costs
the company $1,000 to place a purchase order and its annual holding cost rate is 25%.
The supplier has recently offered the following non-inclusive price schedule:

Order Size Price per Unit

First 500 200
Over 500 195

Determine the optimal purchase quantity (to the nearest 100 units) for the computer
manufacturing company. (13 marks)
 End of Paper 
Suggested Solutions

Question 1

(b) (i)
Annual ordering cost = 500*12 = $6000
Annual holding cost = 100*0.2*1000/2 = $10000
Annual total cost = $16,000

(b) (ii)
2*1000*12*500
Optimal order quantity = = 774.6
100*0.2
Optimal time between successive orders = 774.6/1000 = 0.77 month
Optimal total cost = $15492

Question 3.

(a)
(i)

Drug Annual Turnove Average

item sales r ratio inventor
code revenu y value
e ($)
877 95800 10 9580
575 91700 10 9170
613 72400 7 10343
763 70100 7 10014
892 40000 4 10000
723 28800 4 7200
101 20900 4 5225
399 13900 4 3475
981 12200 4 3050
096 9900 4 2475

Drug item 877 and 575 should be delivered directly.

(ii)
X (1  Y )
A where X is the cumulative fraction of items and Y is the cumulative
YX
fraction of sales.
A = 0.0909
 Drug Cumulative Cumulative Annual sales
item % of total annual sales revenue ($)
code sales revenue ($)
877 0.57 114290.20 114290.20
575 0.75 150003.44 35713.23
613 0.84 167444.36 17440.92
763 0.89 177779.59 10335.23
892 0.92 184616.69 6837.10
723 0.95 189474.60 4857.91
101 0.97 193104.06 3629.46
399 0.98 195918.73 2814.68
981 0.99 198165.30 2246.57
096 1.00 200000.00 1834.70

Question 4
(c) (i)
L = k(y-m)2
where
L is the loss in dollars per unit
y = the variation of delivery time
m = the target variation of delivery time
k = a constant that depends on the financial importance of the delivery time

(c) (ii)
For the given parameters, L = 10 when y = 30 minutes
k = 10/152 = 0.0444

y = (2/5)/(2*0.0444) = 4.5 minutes

Question 5
(a)

1,4.5 3,8.5
4
4.5 B E 4 5,12.5
A I
7 3.5 6
6.5 6.5
2,7 4,11.5
4.5
C
17.5 F 3 6,14.5
H
8
6.5 2.5 7.5 9,19
D 2.5
7,15 7.5 J
G

8,17
Shortest route: A-B-E-I-J

A-B-E-I-J, shortest time = 19 hours and penalty = 4*1000 = $4000

(b)
2*10000*1000
For unit price = $200, EOQ = = 632 units
200*0.25

Qi Pi Pi*D D*S/Qi I*Pi*Qi/2 Total Cost

500 200 2000000 20000 12500 2032500
600 199.1667 1991667 16666.67 14937.5 2023271
700 198.5714 1985714 14285.71 17375 2017375
800 198.125 1981250 12500 19812.5 2013563
900 197.7778 1977778 11111.11 22250 2011139
1100 197.2727 1972727 9090.909 27125 2008943
1200 197.0833 1970833 8333.333 29562.5 2008729
1300 196.9231 1969231 7692.308 32000 2008923

Optimal purchase quantity is 1200 units.