This is a fairly long, and important chapter. The key points are:
Good inventory management is important for successful organizations.
The key issues are when to order and how much to order.
Because all items are not of equal importance, it is necessary to establish a
classification system for allocating resources for inventory control.
EOQ models answer the question of how much to order. Variations of the basic
EOQ model include the quantity discount model and the economic run size model.
EOQ models tend to be rather robust: even though one or more of the parameters
may be only roughly correct, the model can yield a total cost that is close to the actual
ROP models are used to answer the question of when to order. Different models
are used, depending on whether demand, lead time, or both are variable.
Other models described are the fixed interval model and the single period model
in the supplement.
All of the models in this chapter pertain to independent demand.
The Single-Period Model is used to handle ordering of perishables (such as fresh fruits and vegetables,
seafood, and cut flowers) as well as items that have a limited useful life (such as newspapers and
magazines). Analysis of single-period situations generally focuses on two costs: shortage and excess.
Shortage costs may include a charge for loss of customer goodwill as well as the opportunity cost of lost
sales or unrealized profit per unit. Excess cost pertains to items left over at the end of the period and is the
difference between purchase cost and salvage value. There may be costs associated with disposing of
excess items which would make the salvage value negative and hence increase the excess cost per unit.
Answers to Discussion and Review Questions
Inventories are held (1) to take advantage of price discounts, (2) to take
advantage of economic lot sizes, (3) to provide a certain level of customer service, and (4)
because production requires some in-process inventory.
Effective inventory management requires (1) cost information, information on
demand and lead time (amounts and variabilities), an accounting system, and a priority
system (e.g., A-B-C).
Carrying or holding costs include interest, security, warehousing, obsolescence,
and so on. Procurement costs relate to determining how much is needed, vendor analysis,
inspection of receipts and movement to temporary storage, and typing up invoices.
Shortage costs refer to opportunity costs incurred through failure to make a sale due to lack
of inventory. Excess costs refer to having too much inventory on hand.
Operations Management, 9/e