DSIM 535 Quantitative Methods of Business Chapter 10

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 customer experienced an unsatisfied demand.

incremental analysis

A method used to determine an optimal order quantity by comparing the cost of ordering an additional unit with the cost of not ordering an additional unit.

deterministic inventory model

A model where demand is considered known and not subject to uncertainty.

deterministic inventory model

A model where demand is considered known and not subject to uncertainty. constant

probabilistic inventory model

A model where demand is not known exactly; probabilities must be associated with the possible values for demand.

constant supply rate

A situation in which the inventory is built up at a constant rate over a period of time.

Periodic review inventory system

A system in which the inventory position is checked or reviewed at predetermined periodic points in time. Reorders are placed only at periodic review points.

continuous review inventory system

A system in which the inventory position is monitored or reviewed on a continuous basis so that a new order can be placed as soon as the reorder point is reached.

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.

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 unsold items will be sold for a salvage value.

For the EOQ model, which of the following relationships is NOT correct? As the order quantity increases, average inventory increases. As the order quantity increases, the number of orders placed annually decreases. As the order quantity increases, annual ordering cost increases. As the order quantity increases, annual holding cost increases.

As the order quantity increases, annual ordering cost increases.

The EOQ model determines only how frequently to order. considers total cost. All of these are correct. minimizes both ordering and holding costs.

Considers total cost

Quantity discounts

Discounts or lower unit costs offered by the manufacturer when a customer purchases larger quantities of the product.

It is logical to order an amount from the highest discount category when quantity discounts are available. True or False

False

The cost of overestimating demand is usually harder to determine than the cost of underestimating demand. True or False

False

Lead-time demand distribution

The distribution of demand that occurs during the lead-time period.

setup cost

The fixed cost (labor, materials, lost production) associated with preparing for a new production run.

ordering costs

The fixed costs associated with either placing an order with a supplier or setup costs incurred for in-house production. (salaries, paper, transportation)

Inventory Position

The inventory on hand plus the inventory on order.

cycle time

The length of time between the placing of two consecutive orders.

Lead-time demand

The number of units demanded during the lead-time period.

lot size

The order quantity in the production inventory model.

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.

For the production lot size, Q, the average inventory is one-half the maximum inventory, or 1/2Q. False True

True

If lead time is longer than the review period, the order quantity at any review point is the amount needed for the inventory on hand plus all outstanding orders to reach the replenishment level. False True

True

If the optimal production lot size decreases, average inventory increases. True or False

True

When there is probabilistic demand in a multiperiod model, the inventory level will not decrease smoothly and can fall below 0. True or False

True

Safety Stock

inventory maintained in order to reduce the number of stock-outs resulting from higher-than-expected demand

Shortage or stock-out

occurrence when demand cannot be supplied from inventory

The economic production lot size model is appropriate when there is a constant supply rate for every period, without pause. demand exceeds the production rate. ordering cost is equivalent to the production setup cost. All of these are correct.

ordering cost is equivalent to the production setup cost.

Which of the following would NOT be considered part of a holding cost? insurance cost cost of capital warehouse overhead shipping cost

shipping cost

cost of capital

the cost a firm incurs to obtain capital for investment. May be stated as an annual percentage rate, and it is part of the holding cost associated with maintaining inventory

reorder point

the inventory position at which a new order should be placed

Economic Order Quantity (EOQ)

the order quantity that minimizes the sum of annual inventory carrying cost and annual ordering cost

lead time

the time between placement of an order and its receipt

holding costs

variable costs associated with having inventory and maintaining it. This cost may be stated as a percentage of the inventory investment as a cost per unit