Module8

Question 1

What is inventory management?

Answer 1

Inventory management involves planning, controlling, and overseeing the storage and movement of goods to minimize costs while meeting customer demands.

Question 2

What are the main functions of inventory?

Answer 2

Permit operations (pipeline inventory), meet anticipated customer demand (anticipation stocks), and provide risk protection (buffers, price hedging).

Question 3

What is the Economic Order Quantity (EOQ) model?

Answer 3

A method to determine the optimal order quantity that minimizes total inventory costs, including holding and ordering costs.

Question 4

What are the key variables in the EOQ model?

Answer 4

• D: Annual demand
• C: Unit cost
• S: Setup cost per order
• h: Holding cost per year as a fraction of product cost
• Q: Order quantity.

Question 5

What is cycle inventory?

Answer 5

The average inventory held due to producing or ordering in lots larger than demand, calculated as Lot Size/2.

Question 6

What are the components of holding cost?

Answer 6

• Cost of capital
• Storage costs
• Obsolescence/spoilage costs
• Handling costs
• Occupancy costs.

Question 7

What is the Newsvendor model?

Answer 7

An inventory management model for single-period scenarios with stochastic demand, focusing on balancing overage and underage costs.

Question 8

How do you calculate the Critical Ratio (CR) in the Newsvendor model?

Answer 8

CR = (Sales Price - Purchase Cost) / (Sales Price - Salvage Value).

Question 9

What are the key assumptions of the EOQ model?

Answer 9

• Instantaneous production
• Immediate delivery
• Deterministic and constant demand
• Constant setup cost
• Products analyzed individually.

Question 10

What is the primary goal of inventory management?

Answer 10

To enable purchasing in lot sizes that minimize the sum of material, ordering, and holding costs across the supply chain.