Quantitative Methods

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For the EOQ model, which of the following relationships is incorrect?

As the order quantity increases, annual ordering cost increases

Which of the following is not implied when average inventory is Q/2, where Q is the order quantity?

Backorders are permitted

If an item's per-unit backorder cost is greater than its per-unit holding cost, no intentional shortage should be planned.

F

Periodic review systems require smaller safety stock levels than corresponding continuous review systems

F

The cost of overestimating demand is usually harder to determine than the cost of underestimating demand

F

The terms "inventory on hand" and "inventory position" have the same meaning.

F

The time between placing orders is the lead time

F

To be considered as inventory, goods must be finished and waiting for delivery

F

When quantity discounts are available, order an amount from the highest discount category.

F

The maximum inventory with backorders is

Q−S (box)

Constant demand is a key assumption of the EOQ model.

T

If the optimal production lot size decreases, average inventory increases

T

In the EOQ model, the average inventory per cycle over many cycles is Q/2.

T

In the periodic review model, the order quantity at each review period must be sufficient to cover demand for the review period plus the demand for the following lead time

T

The EOQ model is insensitive to small variations or errors in the cost estimates.

T

The single-period inventory model is most applicable to items that are perishable or have seasonal demand

T

When demand is independent, it is not related to demand for other components or items produced by the firm.

T

When there is probabilistic demand in a multi-period model, the inventory level will not decrease smoothly and can fall below 0

T

Goodwill Cost

a cost associated with a back-order, 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

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 a 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 continous basis so that new order can be placed as soon as the reorder point is reached

Constant Deman 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 inventory model with planned shortages, the optimal order quantity results in

annual ordering cost = annual holding cost + annual backordering cost

The EOQ model

considers total cost

Shortage, or Stock-out

demand that cannot be supplied from inventory

Safety stock

depends on the variability of demand during lead time

Inventory models in which the rate of demand is constant are called

deterministic models.

Quantity Discounts

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

Safety Stock

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

Inventory

is held against uncertain usage so that a supply of items is available if needed.

The objective of the EOQ with quantity discounts model is to

minimize the sum of annual carrying, holding, and purchase costs.

The economic production lot size model is appropriate when

ordering cost is equivalent to the production setup cost.

In the single-period inventory model with probabilistic demand,

probabilities are used to calculate expected losses

Periodic review inventory systems

require larger safety stock levels than corresponding continuous review systems

Which cost would not be considered part of a holding cost?

shipping cost

A firm that is presently using the Economic Order Quantity model and is planning to switch to the Economic Production Lot-Size model can expect

the Q* to increase

Inventory position is defined as

the amount of inventory on hand plus the amount of inventory on order

Cost of Capital

the cost a firm 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

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

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 Cost

the fixed cost (salaries, paper, transportation, etc.) associated with placing 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

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

Economic Order Quantity

the order quantity that minimizes the annual holding cost plus the annual ordering cost

The definition of service level used in this chapter is

the percentage of all order cycles that do not experience a stockout

Annual purchase cost is included in the total cost in

the quantity discount model

Back-order

the receipt of an order for a product when no units are in inventory. these back-orders become shortages, which are eventually satisfied when a new supply of the product becomes available

For inventory systems with constant demand and a fixed lead time,

the reorder point = lead-time demand

Lead Time

the time between the placing of an order and its receipt in the inventory system


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