C10 12ed - GLOSSARY Economic order quantity (EOQ) The order...

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GLOSSARY Economic order quantity (EOQ) The order quantity that minimizes the annual holding cost plus the annual ordering cost. Constant demand rate An assumption of many inventory models that states that the same number of units are taken from inventory each period of time. Holding cost The cost associated with maintaining an inventory investment, including the cost of the capital investment in the inventory, insurance, taxes, warehouse overhead, and so on. This cost may be stated as a percentage of the inventory investment or as a cost per unit. Cost of capital The cost a fm incurs to obtain capital for investment. It may be stated as an annual percentage rate, and it is part of the holding cost associated with maintaining inventory. Ordering cost The fixed cost (salaries, paper, transportation, etc.) associated with plac- ing an order for an item. Inventory position The inventory on hand plus the inventory on order. Reorder point The inventory position at which a new order should be placed. Lead time The time between the placing of an order and its receipt in the inventory system.
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Lead-time demand The number of units demanded during the lead-time period. Cycle time The length of time between the placing of two consecutive orders. Constant supply rate A situation in which the inventory is built up at a constant rate over a period of time. Lot size The order quantity in the production inventory model. Setup cost The fixed cost (labor, materials, lost production) associated with preparing for a new production run. Shortage or stock-out Demand that cannot be supplied from inventory. Backorder The receipt of an order for a product when no units are in inventory. These backorders become shortages, which are eventually satisfied when a new supply of the product becomes available. Goodwill cost A cost associated with a backorder, a lost sale, or any form of stock-out or unsatisfied demand. This cost may be used to reflect the loss of future profits because a cus- tomer experienced an unsatisfied demand. Quantity discounts Discounts or lower unit costs offered by the manufacturer when a customer purchases larger quantities of the product. Deterministic inventory model A model where demand is considered known and not subject to uncertainty. Probabilistic inventory model A model where demand is not known exactly; probabili- ties must be associated with the possible values for demand. Single-period inventory model An inventory model in which only one order is placed for the product, and at the end of the period either the item has sold out, or a surplus of un- sold items will be sold for a salvage value. Incremental analysis A method used to determine an optimal order quantity by compar- ing the cost of ordering an additional unit with the cost of not ordering an additional unit.
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This note was uploaded on 03/07/2010 for the course MATH 2310 taught by Professor Shakroh during the Spring '09 term at Langara.

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C10 12ed - GLOSSARY Economic order quantity (EOQ) The order...

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