MGOC20H3 Lecture Notes - Lecture 1: Economic Order Quantity, Random Variable, Operations Management
Document Summary
Types of inventory: raw material, purchased but not processed, work-in-process, undergone some change but not completed, a function of cycle time for a product, maintenance/repair/operating, necessary to keep machinery and processes productive, finished goods, completed product awaiting shipment. Other criteria than annual dollar volume may be used: anticipated engineering changes, delivery problems, quality problems, high unit cost. P(d = d) = probability demand is d units. E(q) = expected cost if order q units. D = demand, random variable c(d,q) = cost if order q units and demand is d units co = cost of overstocking cs = cost of understocking qdcddp. E(q) is a convex function so optimal order quantity (q*) is smallest value q such that d. If d q and you order q+1 unit: you are overstock by additional unit cost = cop(d q) If d>q and you order q+1 unit: you are understock by 1 less unit save = csp(d>q) = cs[1-p(d q)]
