Page 271 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes Self Assessment

Fill in the blanks:
4. When the price to be paid for an unit of a material is fixed, the price goes on
……………….when the lot size increases.

5. Under the ………………….method, generally the total cost of ordering two lots would be
considered and the quantity discount to be availed and the lot which reveals the lowest
total cost inclusive of the purchase price is said to be the EOQ.
6. Under …………… approach, the EOQ is decided based on the total annual cost associated
with different lots and the lot with least total annual cost would be chosen.
13.2 Right Time

At what exact time the purchaser has to place his orders of replenishing his stock is a question?
But whether replenishment is required or not, once again depends upon proper maintenance
and management of materials. Because, the production activities should not be hampered due to
storage of materials in the stock and even the working capital should not be blocked-up due to
excessive storage of materials/unnecessary piling-up of stock. Significant factors to be taken
note of are:

1. Lead Time (LT): Lead time is the time lag between indenting and receiving materials or the
time gap between placing an order and receiving the materials. For example, Mr. X is a
manufacturer and is going to place an order for replenishing stock and places the order on
December 1 of 2009 and he receives the material on 28 February 2010. Then the LT is
th
st
2 months.
For the purpose of controlling the LT, it is divided into:
(i) Internal Lead Time/Administrative Lead Time (ALT) (If the lead is time created due
to the influence of the internal administration, then it is (ALT).
(ii) Suppliers LT (SLT) (If the L.T. is created due to the influence of the outside supplier,
then it is S.L.T.).

2. Investment Policy: In order to determine whether the company has sufficient money to
invest on inventories.
3. Storage Capacity and Related Costs: Quantity of materials the stores can hold and the
related carrying costs.
4. Market Conditions: Whether the prevailing market conditions are conductive to purchase
the materials is to be verified, (i.e., Market Intelligence).
5. Nature of the material to be indented
6. Rate of consumption
7. Government policy (stringent/strict or liberal)

The stock levels are classified into five groups as under:
(i) Maximum stock level (Mx. S.L.)
(ii) Minimum stock level (Mn. S.L.)
(iii) Reorder stock level (ROL)

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