Exam 10: Inventory Models

When demand is independent, it is not related to demand for other components or items produced by the firm.

The Fitness Shop is considering ordering a special model exercise machine. Each unit will cost the shop $410 and it will sell for $750. Any units not sold at the regular price will be sold at the year-end model clearance for $340. Assume that demand follows a normal probability distribution with $\mu$ = 20 and $\sigma$ = 6. What is the recommended order quantity?

Periodic review systems require smaller safety stock levels than corresponding continuous review systems.

Kellam Images prints snack food bags on long rolls of plastic film. The plant operates 250 days a year. The daily production rate is 6000 bags, and the daily demand is 3500 bags. The cost to set up the design for printing is $300. The holding cost is estimated at 2 cents per bag. a.What is the recommended production lot size? b.If there is a five-day lead time to set up the line, what is the recommended reorder point?

If the optimal production lot size decreases, average inventory increases.

Demand for a popular athletic shoe is nearly constant at 800 pairs per week for a regional division of a national retailer. The cost per pair is $54. It costs $72 to place an order, and annual holding costs are charged at 22% of the cost per unit. The lead time is two weeks. a.What is the EOQ? b.What is the reorder point? c.What is the cycle time? d.What is the total annual cost?

When there is probabilistic demand in a multi-period model, the inventory level will not decrease smoothly and can fall below 0.

In the single-period inventory model with probabilistic demand,

The cost of overestimating demand is usually harder to determine than the cost of underestimating demand.

What compromise must be made in the how-much-to-order decision?

Constant demand is a key assumption of the EOQ model.