Page 259 - DMGT501_OPERATIONS_MANAGEMENT

Unit 10: Economic Order Quantity

10.3 Summary Notes

Because of the separate databases, no one in any area of the company has access to all
company information. Another problem with separate databases is that they may contain
conflicting information, due to many possible reasons. The purpose of ERP is to avoid

these problems by combining all these separate databases into one common database for
the entire organization, and possibly even for the entire supply chain.
The advantages that accrue from this approach is that any one any where within the
organization has access to all information and there is an increase speed in retrieving
information. Extending this idea to an entire supply chain, the advantages become
obvious. All members of the supply chain have access to the same information and can
utilize the same information for purposes of planning and execution. Not only does this
make planning and forecasting simpler, some companies report reducing inventory levels
through to the supply chain by 50 per cent or more.
In the brave new world of networking data, we are moving from point of purchase to point
of use, which gets buyers and sellers much closer to what they both want and need. Global
manufacturing excellence will soon be measured against anticipation—how early can you
know what consumers want? How early can you deliver it? That’s the new demand-driven
supply chain, and the global future.

10.4 Keywords

Christmas Tree Problem: This type of problem occurs where demand is probabilistic. In such
cases policies are based on the probability of the occurrence of the particular event rather than
actual costs.

Economic Order Quantity (EOQ) Models: The basic approach to determining fixed order sizes—
are the Economic Order Quantity (EOQ) models. The basic EOQ model is concerned primarily
with the cost of ordering and the cost of holding inventory.

Fixed Time Quantity Systems: These systems are “time triggered”, at an identified fixed time the

fixed-time quantity model initiates an order to replenish the stock.
Price-Break Models: When item cost varies with volume ordered, the result is a modified simple

lot size situation called the quantity volume case or price break model.
Re-order Level: The inventory level at which the order is released is known as the reorder level.
10.5 Self Assessment

Fill in the blanks:
1. The ........................ is based on the assumptions that production is instantaneous
2. A production run incurs a ........................ and the products can be analysed singly.
3. The ........................ is deterministic and there is no uncertainty about the quantity or timing
of demand.
4. The EOQ model provides a solution to the problem of determining when an order should
be placed and how much should be ordered so as to ........................ .
5. The basic EOQ model is concerned primarily with the cost of ordering and the cost of
........................ .
6. ........................ generate order quantities that vary from period to period, depending on the
usage rates

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