Inventory Management

Question 1

Inventory costs are about ____ % of the value of inventory.

Answer 1

30

Question 2

Carrying/Holding Cost

Answer 2

The cost of holding something in inventory; opportunity cost: Lost interest

carrying cost=proportional to inventory

Question 3

Ordering Cost

Answer 3

Cost of placing an order (AKA, processing purchase order).

ordering cost= NOT proportional to inventory

Question 4

Shortage/Stockout cost

Answer 4

Loss of sales when demand is not met

-difficult to quantify

Question 5

D=

Answer 5

Annual demand

Question 6

Continuous Inventory System:

Answer 6

• FIXED AMOUNT ordered
• once inventory hits a certain level, new order is automatically placed
• time between orders varies

Question 7

Periodic Inventory System:

Answer 7

• VARIABLE AMOUNT ordered

- fixed time period between each order

Question 8

What are the 6 assumptions of EOQ model?

Answer 8

1. Demand is known with certainty
2. Demand is relatively constant
3. No shortages allowed
4. Lead time for receipts/orders is constant
5. The order quantity is received all at once
6. Order received just as inventory is depleted

Question 9

Q=

Answer 9

inventory level (quantity)

Question 10

d=

Answer 10

daily demand

Question 11

Minimize total annual inventory cost=

Answer 11

Total Annual Order Costs + Total Annual Carrying Costs + Total Annual Shortage Costs

Question 12

D/Q=

Answer 12

of orders per year

Question 13

When do you use the simple version of Optimal Quantity function?

Answer 13

when you do not produce everything yourself, meaning YOU SEND IT OFF TO OTHER FIRMS

Question 14

When do you use the more complicated model of Optimal Quantity function?

Answer 14

When you produce all parts in house-no outsourcing!