Exam 2 Help
Product cost
is simply the amount paid to suppliers for the products (materials and components)
that are purchased.
Order cost
or setup cost is the cost associated with replenishing inventories.
Stockout cost
(sometimes called shortage cost) is incurred when a company does not have
inventory available to meet demand.
Service Level
can be measured in two different ways:
•
Cycle Service Level = Probability of no stockouts in an given order cycle
•
Unit Service Level = Percentage of demand that will be satisfied from stock on
hand.
Total Acquisition Cost (TAC)
the sum of all relevant inventory costs incurred each year
.
In general, the following steps must be done to determine the order quantity when
quantity discounts are available:
Step 1. Identify the price breaks offered by the supplier.
Step 2. Calculate the EOQ at each price break, starting with the lowest price possible
Step 3. Evaluate the feasibility of each EOQ value. If the calculated EOQ for a given
price is large enough to qualify for that specific price, then the calculated EOQ is feasible.
If the EOQ calculated using the lowest price category is feasible, then it is the lowest
TAC order quantity. If it is not feasible (as in the Trexoid example above where the EOQ
for $19 price was 281 units, but 1000 units were required to qualify for that price), then
go to Step 4.
.
Step 4. Calculate the TAC for each feasible EOQ and for the minimum quantity required
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 Spring '08
 Cooper

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