Economic Order Quantity

the order quantity that minimizes the annual holding cost plus the annual ordering cost

Constant Deman Rate

an assumption of many inventory models that states that the same number of units are taken from inventory each period of time

Holding Cost

the cost associated with maintaining an inventory investment, including the cost of the capital investment in the inventory, insurance, taxes, warehouse overhead, and so on. this cost may be stated as a percentage of the inventory investment or as a cost per unit

Cost of Capital

the cost a firm incurs to obtain capital for investment. it may be stated as an annual percentage rate, and it is part of the holding cost associated with maintaining inventory

Ordering Cost

the fixed cost (salaries, paper, transportation, etc.) associated with placing an order for an item

Inventory Position

the inventory on hand plus the inventory on order

Reorder Point

the inventory position at which a new order should be placed

Lead Time

the time between the placing of an order and its receipt in the inventory system

Lead-Time Demand

the number of units demanded during the lead-time period

Cycle Time

the length of time between the placing of two consecutive orders

Constant Supply Rate

a situation in which the inventory is built up at a constant rate over a period of time

Lot Size

the order quantity in the production inventory model

Setup Cost

the fixed cost (labor, materials, lost production) associated with preparing for a new production run

Shortage, or Stock-out

demand that cannot be supplied from inventory

Back-order

the receipt of an order for a product when no units are in inventory. these back-orders become shortages, which are eventually satisfied when a new supply of the product becomes available

Goodwill Cost

a cost associated with a back-order, a lost sale, or any form of stock-out or unsatisfied demand. this cost may be used to reflect the loss of future profits because a customer experienced an unsatisfied demand

Quantity Discounts

discounts or lower unit costs offered by the manufacturer when a customer purchases larger quantities of the product

Deterministic Inventory Model

a model where demand is considered known and not subject to uncertainty

Probabilistic Inventory Model

a model where demand is not known exactly; probabilities must be associated with the possible values for demand

Single-period Inventory Model

an inventory model in which only one order is placed for the product, and at the end of the period either the item has sold out, or a surplus of unsold items will be sold for a salvage value

Incremental Analysis

a method used to determine an optimal order quantity by comparing the cost of ordering an additional unit with the cost of not ordering an additional unit

Lead-time Demand Distribution

the distribution of demand that occurs during the lead-time period

Safety Stock

inventory maintained in order to reduce the number of stock-outs resulting from higher than expected demand

Continuous Review Inventory System

a system in which the inventory position is monitored or reviewed on a continous basis so that new order can be placed as soon as the reorder point is reached

Periodic Review Inventory System

a system in which the inventory position is checked or reviewed at a predetermined periodic points in time. Reorders are placed only at periodic review points

Inventory

is held against uncertain usage so that a supply of items is available if needed.

Inventory models in which the rate of demand is constant are called

deterministic models.

The EOQ model

considers total cost

Which cost would not be considered part of a holding cost?

shipping cost

For inventory systems with constant demand and a fixed lead time,

the reorder point = lead-time demand

Safety stock

depends on the variability of demand during lead time

The economic production lot size model is appropriate when

ordering cost is equivalent to the production setup cost.

The maximum inventory with backorders is

Q−S (box)

Annual purchase cost is included in the total cost in

the quantity discount model

In the single-period inventory model with probabilistic demand,

probabilities are used to calculate expected losses

For the inventory model with planned shortages, the optimal order quantity results in

annual ordering cost = annual holding cost + annual backordering cost

The definition of service level used in this chapter is

the percentage of all order cycles that do not experience a stockout

Periodic review inventory systems

require larger safety stock levels than corresponding continuous review systems

Inventory position is defined as

the amount of inventory on hand plus the amount of inventory on order

A firm that is presently using the Economic Order Quantity model and is planning to switch to the Economic Production Lot-Size model can expect

the Q* to increase

Which of the following is not implied when average inventory is Q/2, where Q is the order quantity?

Backorders are permitted

For the EOQ model, which of the following relationships is incorrect?

As the order quantity increases, annual ordering cost increases

The objective of the EOQ with quantity discounts model is to

minimize the sum of annual carrying, holding, and purchase costs.

To be considered as inventory, goods must be finished and waiting for delivery

F

When demand is independent, it is not related to demand for other components or items produced by the firm.

T

Constant demand is a key assumption of the EOQ model.

T

In the EOQ model, the average inventory per cycle over many cycles is Q/2.

T

The single-period inventory model is most applicable to items that are perishable or have seasonal demand

T

The time between placing orders is the lead time

F

If the optimal production lot size decreases, average inventory increases

T

If an item's per-unit backorder cost is greater than its per-unit holding cost, no intentional shortage should be planned.

F

When quantity discounts are available, order an amount from the highest discount category.

F

When there is probabilistic demand in a multi-period model, the inventory level will not decrease smoothly and can fall below 0

T

In the periodic review model, the order quantity at each review period must be sufficient to cover demand for the review period plus the demand for the following lead time

T

Periodic review systems require smaller safety stock levels than corresponding continuous review systems

F

The cost of overestimating demand is usually harder to determine than the cost of underestimating demand

F

The terms "inventory on hand" and "inventory position" have the same meaning.

F

The EOQ model is insensitive to small variations or errors in the cost estimates.

T