Page 125 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes  As the purchase price changes, the inventory-holding cost also may change since the
investment in inventory is different. Because each discount category may represent a
different inventory holding cost, EOQ must be calculated for each discount category.
 Fixed order period model is also known as P-system. In P-System, order period is fixed
but Order quantity varies and is equal to replenishment level minus the inventory on
hand and on order.
 Safety stock is the amount of inventory carried in addition to the average demand to take
care of fluctuations in demand.
 Optimal safety stock is the quantity of safety stock that is expected to minimize the total of
the relevant costs (or the total of stock out cost and safety stock carrying cost).

8.6 Keywords

EOQ: EOQ is an inventory model that determines order quantity that meet customer service
levels while minimizing total holding costs.

Fixed Cost: Fixed Costs are expenses that don’t change based on production or sales volumes.
They include salaries, rent, insurance, etc.
Inventory Cost: Cost recorded upon purchase of inventory is known as inventory cost; includes
invoice price less cash discounts plus freight and transportation and applicable insurance, taxes
and tariffs.
Inventory Holding Costs: Inventory holding cost is the cost associated with acquiring and
retaining inventory including cost of storage space, lost, stolen, or damaged merchandise,
insurance, personnel and management costs, and interest.
Inventory Management: Inventory management is the process of ensuring the availability of
products through inventory administration.

Inventory Model: The evaluation of alternative inventory design characteristics or inventory
parameters using analytical or simulation processes to assist management decisions is known
as inventory model.

Inventory Ordering Costs: Inventory ordering costs are those costs associated with the acquisition
of inventory, such as clerical costs and transportation costs.
Overbuying: Overbuying refers to buy excessively, especially to buy more than one needs or can
afford.
Replenishment Level: When the number of units drops below this specified amount, the inventory
level is refilled. That is known as replenishment level.
Safety Stock: The inventory a company holds above normal needs as a buffer against delays in
receipt of supply or changes in customer demand is known as safety stock.
Set-up Costs: Setup cost is the cost incurred to get equipment ready to process a different batch
of goods.

Shortage Costs: Shortage costs are the costs that fall with increases in the level of investment in
current assets.
Variable Costs: Costs that vary directly with the level of activity within a short time are referred
to as variable costs. Examples include costs of moving cargo inland on trains or trucks, stevedoring
in some ports, and short-term equipment leases.

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