*CPIM Exam – Basics of Supply Chain Management Practice Study Sheet*

### Chapter Ten – Order Quantities

• Main question - Decision rules to determine how much should be ordered at one time

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__Stock keeping unit (SKU)__are individual items in a particular inventory• Lot or batch is a quantity produced together and sharing the same production costs and specifications

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__Lot for lot__says order exactly what is needed – used in just-in-time environment, also for “A” inventory items•

__Fixed order quantity__rules say exactly how many should be ordered each time an order is placed (i.e. 500 units). This is a simple system•

__Min-max system__– orders made when quantity available hits order point. At that point order the difference between the quantity on hand and the maximum (i.e. if you have a maximum or 500 units, and you order at 100 units, your order would be placed for 400 units)•

__Order “n” periods supply__– demand for a number of future periods (months, days or weeks)•

__Economic Order Quantity (EOQ)__is the decision method to minimize the cost of ordering and the cost of carrying inventory• Assumptions of EOQ 1) demand is constant 2) item purchased or produced in lots 3) order preparation costs and inventory costs are known 4) replacement occurs all at once

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__Average inventory__= order quantity / 2•

__Number of orders per year__= annual demand / order quantity• A = # of units annually S = ordering costs I = annual carrying costs (percentage) c = unit cost Q = order quantity

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__Annual ordering costs__= number of orders * cost per order•

__Annual carrying cost__= average inventory * cost of carrying one unit for one year•

__Total annual costs__= annual ordering costs + annual carrying costs• EOQ occurs where the ordering costs = the carrying costs. EOQ increases as the annual demand (A) and the cost of ordering (S) increases, and will decrease as the cost of carrying inventory (i) and unit cost (c) increase.

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__Quantity discounts__include 1) purchase costs 2) ordering costs 3) carrying costs (saving on purchase and ordering costs, increase in carrying costs)•

__Period order quantity (POQ)__calculated an economic time between orders. Divide EOQ / average weekly usage. Ordering costs are the same but carrying costs are reduced• EOQ issues

1. lumpy demand – EOQ assumes demand is uniform and that replenishment occurs immediately. When not true use period – order quantity

2. anticipation inventory –when you need to build ahead

3. minimum orders – may be a rule from suppliers – for C items, order plenty, not an EOQ

4. transportation inventory can reduce cost per unit for large orders

5. multiples (ship in skid-load lots)