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16 Cards in this Set

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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

ordering/setup


holding/carrying


receiving/inspection


shortage

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

inverse

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


2

EOQ (equation)

sq.root( 2DS/H)

Expected number of orders (equation)

Demand


EOQ

Time between orders (equation)

# days


N

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