BUS 322 Lecture Notes - Lecture 3: Quality Costs, Stockout, Lead Time

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

Document Summary

Ordering costs: salaries, expenses processing, acquisition order irrespective size. Carrying costs: keep inventory on hand, % item value => biggest problem. Not carrying sufficient inventory: not meet customer" needs. Uneven production (expediting goods, extra setup, overtime) => appropriate level = minimize all costs over specific period (annually) => hard for direct conflict costs => how much, how often order/produce. Economic order quantity (eoq): stochastic inventory model (demand and parameters constant), minimizing oc and cc identify point = saving order frequency reduction >= carrying costs of additional stock same quantity each reorder point. Demand, oc, cc, lead time = certainty. Quality costs considered only to the extent affect oc and cc. Graph cost relationships: tc minimize at annual cc = annual oc. Lowest tc = eoq (require trial, error for exact eoq) Not very accurate if quantities chosen bracket the true eoq. => cannot used: changes prices due to changes lot sizes. No inventories => inventory cost waste + efficiency.