BUS 322 Lecture Notes - Lecture 6: Lead Time, Economic Order Quantity, Stockout

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 322
• Professor: Mahmoudian Fereshteh

Document Summary

Insurance: costs of not carrying sufficient (insufficient) inventory: the costs that results from not having enough inventory on hand to meet customers" needs such as stockout costs, costs of quality: Quantity discounts forgone: customer ill will, erratic production (expediting of goods, extra set up, added transportation charges, lost sales. The right level of inventory to carry is the level that minimizes the total of these three groups of costs. As some of the costs involved are in direct conflict with one another, such minimization is difficult to achieve. As inventory levels increase, the costs of carrying inventory also increase, but the costs of not carrying sufficient inventory decrease. Thus, the manager must balance off the three groups of costs against one another. The problem really has two dimensions how much to order (or how much to produce in a production run) and how often to do it. The how-much-to-order question is commonly referred to as the economic order quantity (eoq).