Chapter 11 Flashcards
Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to
exploit economies of scale and lower cost.
The quantity of inventory that a stage of the supply chain either produces or purchases at a given time is
a lot or batch.
The average inventory in the supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer is
cycle inventory.
A graphical plot depicting the level of inventory over time is
an inventory profile.
When demand is steady, cycle inventory and lot size are related as
Cycle Inventory = Q/2.
Average flow time resulting from cycle inventory is equal to
Cycle Inventory/Demand = Q/2D.
Cycle inventory is primarily held to
take advantage of economies of scale and reduce cost within the supply chain.
Which of the following is NOT a cost that must be considered in any lot sizing decision?
Manufacturing cost per unit, $M/unit
Which of the following are costs that must be considered in any lot sizing decision?
- Average price per unit purchased, $C/unit
- Fixed ordering cost incurred per lot, $S/lot
- Holding cost incurred per unit per year, $H/unit/year = hC
The primary role of cycle inventory is to allow different stages in the supply chain to
purchase product in lot sizes that minimize the sum of the material, ordering, and holding cost.
Economies of scale in purchasing and ordering motivate a manager to
increase the lot size and cycle inventory.
The price paid per unit is referred to as
the material cost and is denoted by C.
All costs that do not vary with the size of the order but are incurred each time an order is placed are referred to as
the fixed ordering cost and is denoted by S.
The cost of carrying one unit in inventory for a specified period of time, usually one year, is referred to as
the holding cost and is denoted by H.
Which of the following would NOT be an example of a fixed ordering cost?
Labor cost incurred to manufacture a part
Which of the following would be an example of a fixed ordering cost?
- Administrative cost incurred to place an order
- Trucking cost incurred to transport an order
- Labor cost incurred to receive an order
Which of the following would NOT be included in holding cost?
Cost of manufacturing
Which of the following would be included in holding cost?
- Cost of capital
- Cost of physically storing the inventory
- Cost that results from the product becoming obsolete
Total ordering and holding costs
Are relatively stable around the economic order quantity.
If demand increases by a factor of k, the optimal lot size increases by a factor of
the square root of k.
Aggregating across products, retailers, or suppliers in a single order allows for
a reduction in purchase price per unit.
Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because
fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers.