Chapter 12 - CHAPTER 12 INVENTORY CONTROL MODELS SOLUTIONS...

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CHAPTER 12 INVENTORY CONTROL MODELS SOLUTIONS TO DISCUSSION QUESTIONS 12-1. Inventory is an important consideration for managers because as much as 50% of the total assets of a company can be tied up in inventory. Because of this large investment in inventory, controlling inventory becomes extremely important for most organizations. On the one hand, companies will try to reduce the cost of inventory by reducing amounts of inventory on hand. On the other hand, however, companies realize that customer dissatisfaction can be increased significantly due to low inventory levels and stockouts. Thus, it is important to reach a fine balance between low and high inventory levels. 12-2. The purpose of inventory control is to regulate the flow of inventory at the various inventory storage locations within the organization. This can be done by determining how much inventory is to be ordered and when the inventory should be ordered. 12-3. Storing large quantities of inventory can eliminate shortages and stockouts. On the other hand, storing large quantities of inventory can significantly increase the cost of carrying or holding inventory. Therefore, a delicate balance must be sought between increased carrying costs and shortages and stockouts. In determining how much inventory a company should have on hand to avoid shortages and stockouts, the overall objective is to minimize carrying costs and shortage or stockout costs. 12-4. Although there can be many factors to be considered in inventory control, there are basically two fundamental decisions that will have to be made. These decisions are (1) how much to order, and (2) when to order. The simplest and the most complex inventory models must answer both of these questions. 12-5. There are a number of assumptions that are made in using the economic order quantity. It is assumed that the cost of the items, the cost of ordering, the cost of holding inventory, and the annual demand are known and constant. It is also assumed that the time it takes to receive an order is known and constant. In the basic economic order quantity model, it is assumed that stockouts can be avoided, there are no quantity discounts, and replenishment is instantaneous. 12-6. The major costs in determining the economic order quantity include (1) the cost of the items, (2) the cost of ordering, (3) the cost of carrying or holding inventory, (4) the cost of safety stock, and (5) the cost of stockouts. Under the basic economic order quantity model, it is assumed that there are no stockouts; therefore, the cost of stockouts and the cost of safety stock are not included in the basic model. 12-7. The reorder point specifies when an order is to be placed for new inventory items. When the inventory drops to or below the reorder point, an order is placed. The reorder point for the basic economic order quantity model is determined by multiplying the demand per period times the lead time for a new order. In most cases, it is determined by multiplying the demand per day times the lead time for a new order in days.
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