Learning Objectives
16-1: Describe the Basic Economic Order Quantity (EOQ) model, its assumptions, and use the model to solve problems.
The two fundamental questions in inventory management and control are how much to order or produce, and when to order. The answers depend on the type of inventory control system chosen: continuous review systems, periodic review systems, or single-period order systems. In continuous review systems, the EOQ model is the easiest to use. It is based on six assumptions: a single product is involved; the annual demand is known and occurs uniformly throughout the year with a constant demand rate; the lead time for the receipt of the orders is constant and known; no shortages are allowed; the quantity ordered is received all at once in a single delivery; and there are no quantity discounts.
16-2: Utilize the Economic Production Quantity (EPQ) to solve problems.
For continuous systems (fixed order quantity systems), the optimal production quantity is determined by minimizing the total annual costs, which is the sum of the total annual setup and holding costs.
16-3: Solve problems using the EOQ model with quantity discounts.
For production systems designed to produce a fixed quantity, the optimal production quantity is determined by minimizing the total annual costs, which is the sum of the total annual setup and holding costs. When quantity discounts are in effect, then the economic order quantity is determined by minimizing the total annual costs, which consists of total annual ordering, holding, and purchase costs.
16-4: Discuss the various reorder point models, and work typical problems.
Because the order quantity is fixed in continuous review systems, the question of when to order (the reorder point) is determined by the variability in the demand for a product, the lead time, and the desired service level.
16-5: Explain periodic review systems, and work typical problems.
In periodic review systems (fixed order interval systems), the order interval is fixed, but the quantity ordered varies and depends on fluctuations in the demand and lead time. In such a system, the quantity ordered is an amount that will bring the inventory to a predetermined target level at specific times.
16-6: Discuss single period inventory systems, and work typical problems.
Single-period inventory systems are used for seasonal or one-time purchases. Ordering too much will lead to excess inventory not sold or used. Ordering too little will lead to stock-outs. The optimal ordering or stocking policy is based on achieving a desired service level that balances the stock-out costs and excess-inventory costs.