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16 Cards in this Set

  • Front
  • Back

Reasons to hold more inventory

- customer perceptions of availability

- reduces potential for stockouts

- ordering cost no matter how big order

- high bulk = lower transportation cost

- discounts from suppliers

Reasons to hold less inventory

- financing inventory

- takes up valuable space

- high volume = high taxes at end of year

- theft

ABC Analysis

divides inventories up into 3 classes based on annual dollar volume

annual volume * unit cost = annual $ volume

Inventory costs





EOQ model

determines the optimal order size that minimizes the sum of carrying costs and ordering costs

Assumptions of EOQ

- demand is certain and constant

- no shortages

- constant lead time for orders

- order quantity received at once

- no discounts

The relationship between ordering and holding costs


EOQ variables:

D, H, S, Q, N, T

D= demand

H= holding cost

S= ordering cost

Q= quantity

N= number of orders

T= time between orders

Annual Ordering Cost (equation)

Demand x Ordering Cost

Quantity per order

Annual Holding Cost (equation)

Quantity x Holding Cost


EOQ (equation)

sq.root( 2DS/H)

Expected number of orders (equation)



Time between orders (equation)

# days


Total Annual Cost (equation)

ordering cost - holding cost

D xS Q xH

Q 2

EOQ is robust when

demand and ordering/holding costs are not 100% accurate

Uses for ABC Analysis

to establish policies that focus on the few critical parts and not the many trivial ones