[5] Inventory analysis Flashcards
Fixed ordering cost def
Administrative cost of processing the order, transporting materials, receiving & inspecting the delivery that is independent of order size
Fixed setup cost
The time and material required to set up a process
Why should we keep inventory?
1) Economies of scale —> avg cost of output decreases with volume
2) Production and capacity smoothing —> when demand fluctuates seasonally it may be economical to maintain a constant processing rate
3) Stock-out protection —> inventories held to protect against unexpected supply disruptions or surges in demand
Seasonal inventories
Inventorie maintained to absolve seasonal fluctuations of demand and supply
Safety inventory def
Inventory maintained to insulate the process from unexpected supply disruptions and surges in demand
Why should we avoid inventory?
1) Physical holding cost —> expressed as a fraction ‘h’ of the variable, Cost ‘C’ of acquiring one unit of inventory
2) Opportunity cost —> expressed as ‘rC’ where r = the firm’s annual rate of return
formula for holding one unit of inventory for 1 year
H = (h+r)C
How to work out: Annual purchasing cost
RC
Annual demand rate x cost
How to work out: Annual purchasing cost
RC
Annual demand rate x cost
How to work out: Annual ordering cost
R/Q x S
Order frequency = demand rate/order size
How to work out: Annual holding cost
H(Q/2)
Cost of one item x inventory
Optimal order size formula
Q* = sqrt2SR/H
How does optimal order quantity change if fixed cost increases?
Quantity also increases
How does optimal order quantity change if unit holding cost increases?
Would want to order less
How does optimal order quantity change if the demand quadruples?
Demand goes up by factor of 4, but quantity doubles
