Business Administration 3304K Study Guide - Final Guide: Carrying Cost, Sensitivity Analysis, Fixed Cost
7 Apr 2019
School
Department
Professor
Document Summary
Inventory management the lot size that minimizes total annual inventory holding and ordering costs inventories need to be low enough to avoid excess inventory holding costs but high enough to reduce the frequency of orders and setups. If the annual ordering cost exceeds the annual holding cost, then q should be increased. Time between orders the average elapsed time between receiving or placing replenishment orders = eoq/d. Important to perform a sensitivity analysis on these calculations: see how sensitive the eoq formula is to small changes, errors or uncertainties in demand, setup costs, and holding costs. Change in demand rate (d: eoq increases in proportion to the square root of the annual demand, when demand rises, the lot size also rises but at a slower rate than demand. Change in the setup costs (s: increasing s increases the eoq and the average cycle inventory, reducing s reduces the eoq, allowing smaller lot sizes to be produced economically.
