LOG307: Inventory holding cost is one of the highest costs

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Inventory holding cost is one of the highest costs a company incurs. Therefore, companies always try to reduce inventory costs by implementing appropriate strategies. One such company is Pepsico Foodservice. Pepsico is trying to control inventory costs for one of its products: Lay’s chips. The weekly cost of holding one carton of chips is $25.

Based on the past data, it was estimated that the weekly demand for Lay’s chips averaged 120 units, with a standard deviation of 25 units. If the demand for the chips is more than the items on hand, customers would choose to buy a different brand of chips. The production facility at Batam can change its production to 3 quantities only – 100, 120, and 150 cartons per week. But changing the production quantity is expensive; it costs $3,000 to change the production quantity. The company is trying to evaluate the impact of the following production policies:

  • Produce a quantity of 150 units next week if the on-hand inventory this week is less than 20 units (OHL)
  • Produce a quantity of 100 units next week if the on-hand inventory this week is more than 80 units (OHH)
  • Continue with the present production quantity otherwise There are 75 cartons of chips in the store currently, and the production quantity is 120.


(a) Based on the above policy, construct a simulation model for one year (52 weeks) for the production of chips. Determine the total cost. Show the change in inventory and production quantity over the weeks. (20 marks)

(b) Run the model developed in part for 500 iterations to estimate the average yearly cost for different values of OHH, ranging from 30 to 80, in multiples of 10. Analyze what value of OHH provides the minimum cost on average. Calculate other summary statistics to have a better idea of the best value.

(c) Suggest any other production policies that might be useful to investigate.

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