58 terms

Quantitative Methods

Chapter 10
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
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
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
When demand is independent, it is not related to demand for other components or items produced by the firm.
Constant demand is a key assumption of the EOQ model.
In the EOQ model, the average inventory per cycle over many cycles is Q/2.
The single-period inventory model is most applicable to items that are perishable or have seasonal demand
The time between placing orders is the lead time
If the optimal production lot size decreases, average inventory increases
If an item's per-unit backorder cost is greater than its per-unit holding cost, no intentional shortage should be planned.
When quantity discounts are available, order an amount from the highest discount category.
When there is probabilistic demand in a multi-period model, the inventory level will not decrease smoothly and can fall below 0
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
Periodic review systems require smaller safety stock levels than corresponding continuous review systems
The cost of overestimating demand is usually harder to determine than the cost of underestimating demand
The terms "inventory on hand" and "inventory position" have the same meaning.
The EOQ model is insensitive to small variations or errors in the cost estimates.