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How Much and When - How Much When Inventory Models for...

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How Much? When!
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2 Inventory Models for Independent Demand þ Fixed Quantity (Q) System þ Basic economic order quantity ( How much ) þ ReOrder Point “ROP” (When) þ Fixed Period (P) System þ Orders placed at the end of a fixed period (When) þ Inventory counted only at end of period þ Order brings inventory up to target level (How much) Need to determine when and how much to order
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3 Basic EOQ Model 1. Demand is known, constant, and independent 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete 4. Quantity discounts are not possible 5. Only variable costs are setup and holding 6. Stockouts can be completely avoided Important assumptions
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4 Inventory Usage Over Time Figure 12.3 Order quantity = Q (maximum inventory level) Inventory level Time Usage rate Average inventory on hand Q 2 Minimum inventory
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5 The EOQ Model: Calculations of Setup Cost Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Annual setup cost = ( Number of orders placed per year ) x ( Setup or order cost per order ) Annual demand Number of units in each order Setup or order cost per order = = ( S ) D Q Annual setup cost = S D Q
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