Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 21 INVENTORY MANAGEMENT: ECONOMIC ORDER QUANTITY, JIT, AND THE THEORY OF CONSTRAINTS QUESTIONS FOR WRITING AND DISCUSSION 1. Ordering costs are the costs of placing and receiving an order. Examples include clerical costs, documents, and unloading. Setup costs are the costs of preparing equipment and facilities so that they can be used for producing a product or component. Ex- amples include wages of idled production workers, lost income, and the costs of test runs. Carrying costs are the costs of carry- ing inventory. Examples include insurance, taxes, handling costs, and the opportunity cost of capital tied up in inventory 2. As ordering costs decrease, fewer and lar- ger orders must be placed. This, in turn, increases the units in inventory and, thus, increases carrying costs. 3. Reasons for carrying inventory: (a) to bal- ance setup and carrying costs; (b) to satisfy customer demand; (c) to avoid shutting down manufacturing facilities; (d) to take ad- vantage of discounts; and (e) to hedge against future price increases. 4. Stock-out costs are the costs of insufficient inventory, e.g., lost sales and interrupted production. 5. Safety stock is simply the difference between maximum demand and average demand, multiplied by the lead time. By re- ordering whenever the inventory level hits the safety-stock point, a company is en- sured of having sufficient inventory on hand to meet demand. 6. The economic order quantity is the amount of inventory that should be ordered at any point in order to minimize the sum of order- ing and carrying costs. 7. JIT minimizes carrying costs by driving in- ventories to insignificant levels. Ordering costs are minimized by entering into long- term contracts with suppliers (or driving setup times to zero). 8.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7


This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online