The key points in Chapter 12 (Chapter 13) tell us that good inventory management

Question

The key points in Chapter 12 (Chapter 13) tell us that 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 minimum. ROP models are used to answer the question of when to order.

what are the primary pruposes of holding inventory?

What are the requirements for effective inventory management?

What are the major assumptions of the EOQ model?

2

Explanation / Answer

Primary Purpose of Holding Inventory:

1. to meet anticipated customer demand (to meet theanticipation stocks, average demand)
2. to smooth production requirements (createseasonal inventoriesto meet seasonal demand)
3. to decouple operations (eliminate sources of disruptions)
4. to protect against stock-outs (holdsafety stocksto prevent the risk of shortages)
5. to take advantage of order cycles (buys more quantities than immediate requirements - cycle stock, periodic orders, or order cycles)
6. to hedge against price increases (purchase large order to hedge future price increase or implement volumn discount)
7. to permit operations (Little's Law: the average amount of inventory in a system is equal to the product of the average demand rate and the average time a unit is in the system)
8. to take advantage of quantity discounts (supplies may give discount on large orders).

Requirements for Effective Inventory Management:

1.A system to keep track of the inventory on hand and on order

2. A reliable forecast of demand, including forecast error

3. Knowledge of lead times and variability

4. Estimates of holding, ordering and shortage costs

5. Classification system for inventory

Major assumptions of EOQ model:

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