Page 199 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes  If you have both demand and delivery (lead time) uncertainty, you must use a convolution
formula (Bowersox 2010) to calculate the safety stock level.

 The two types of errors in statistical hypothesis test are Type 1 error and Type 2 error.
 Economic batch quantity (EBQ) is a measure employed to determine the quantity of units
that can be produced at minimum average costs in a specified batch or production run.

9.6 Keywords

Economic Order Quantity (EOQ) Model: The basic model concerned primarily with the cost of
ordering and the cost of holding inventory.
Economic Batch Quantity (EBQ): It is a measure employed to determine the quantity of units
that can be produced at minimum average costs in a specified batch or production run.
Inventory: It means any stock of direct or indirect material kept and stocked in order to meet the
expected and unexpected demand in the future.

Inventory Turnover Ratio: It is the ratio of the company’s sales to its average inventory
investment.
Re-order Level: The inventory level at which the order is released is known as the reorder level.

9.7 Review Questions

1. What is economic order quantity (EOQ)? Explain the EOQ model of inventory with its
simplifying assumptions.
2. How is the model of inventory used by a manufacturer different from a retailer?

3. Inventory control system may need to be modified as demand, costs, and competitive
pressures changes. What are the parameters that should be reviewed for reorder systems?
4. What is the cost of uncertainty in demand during lead time?

5. How the EOQ model works with varying lead time and with varying demand?
6. Nuvyug Industries Ltd. has an annual requirement of 5,000 pieces of brake cylinders for its
popular brand of golf carts. Each brake cylinder has a carrying cost of ` 25 per unit per
year. The Ordering Cost per order is ` 800. Calculate the total inventory cost for the
following values of number of orders: 5, 10, 20, and 25. Plot the various costs with respect
to these orders on a graph and use it to find the EOQ.
7. A price discount schedule for an item that we purchase is offered as follows: ` 1.00 per unit
in quantities below 800, ` 0.95 per unit in quantities of 800 to 1599, and ` 0.90 per unit in
quantities of 1600 or more. The requirement is 1600 units per year; the purchase order cost
is ` 50.00 per order; and inventory holding costs are 10 per cent of the average inventory
value per year, or ` 0.10 per unit per year at the ` 1.00 per unit price. The value of EOQ is
400 units. What should the purchase quantity be in order to take advantage of the price
discount?
8. What are the functions of inventory that assist the organization in accomplishment of its
goals?
9. Explain the various costs associated with inventory.
10. The ABC classification is based on focusing efforts where the payoff is highest. Explain.

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