Operations Management: Discussion and Review Questions
Discussion and review questions
7. By definition economic order quantity (EOQ) is the order size that minimizes total annual cost
So to respond to the criticism whish say that EOQ models tend to provide misleading results because values of D, S and H are at best educated guesses, we should explain that first of all the holding cost (H) instead to computed they are determined by management; that’s why the EOQ should be an approximate quantity. In addition as we saw in class that the total cost curve is relatively flat round the EOQ. In other words if the quantity of EOQ change total cost will not increase at much at all.
14. Annual caring cost=
And the average inventory is ; so if the setup cost ”S” decreases the average inventory decrease (because Q decreases). As a consequence the annual carrying cost decreases also.
Taking stock
1. trade-offs
a) Buying additional amounts to take advantage of quantity discounts: the purchased and ordering cost will decrease because we will buy at a large quantity, so we will save money.
But on the other hand we should carry a larger inventory of stock, so the holding inventory cost will increase. b) Treating holding cost as a percentage of unit price instead of a constant amount: If we use the EOQ approach, we should have a small order, so the inventory will be less. On the other side if we use a constant amount of holding cost and there is a change, the inventory stock will not be affected.
c) Conducting cycle counts once a quarter instead of once year: if we conduct the cycle counts once quarter in the year, reduces the costs of inaccuracies by allowing for investigation and correction of the causes of inaccuracies and can also lead to less errors inventory which are due to frequent conducting. In the other hand it increases in labor and overhead cost.
7. By definition economic order quantity (EOQ) is the order size that minimizes total annual cost
So to respond to the criticism whish say that EOQ models tend to provide misleading results because values of D, S and H are at best educated guesses, we should explain that first of all the holding cost (H) instead to computed they are determined by management; that’s why the EOQ should be an approximate quantity. In addition as we saw in class that the total cost curve is relatively flat round the EOQ. In other words if the quantity of EOQ change total cost will not increase at much at all.
14. Annual caring cost=
And the average inventory is ; so if the setup cost ”S” decreases the average inventory decrease (because Q decreases). As a consequence the annual carrying cost decreases also.
Taking stock
1. trade-offs
a) Buying additional amounts to take advantage of quantity discounts: the purchased and ordering cost will decrease because we will buy at a large quantity, so we will save money.
But on the other hand we should carry a larger inventory of stock, so the holding inventory cost will increase. b) Treating holding cost as a percentage of unit price instead of a constant amount: If we use the EOQ approach, we should have a small order, so the inventory will be less. On the other side if we use a constant amount of holding cost and there is a change, the inventory stock will not be affected.
c) Conducting cycle counts once a quarter instead of once year: if we conduct the cycle counts once quarter in the year, reduces the costs of inaccuracies by allowing for investigation and correction of the causes of inaccuracies and can also lead to less errors inventory which are due to frequent conducting. In the other hand it increases in labor and overhead cost.