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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
• 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
• 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
• 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
• 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.
• 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)