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1. Inventory control without reordering
We are concerned with the problem of how much should be ordered and not with the frequency and timing of the order.
Three situations are thought of;
a) Fixed demand under certainity, i.e. a situation wherein the exact number of units demanded is known and is always one
amount. The demand for the period is known and remains stable overtime, the same number of units would be acquired
at the beginning of the period.
b) Uncertain demand with perfect information, the exact number of units demanded may change but the number is known in
advance. We know the probability of demand for different quantities of the commodity and also have perfect information
about the outcomes. We would always place an order equal to the number of units to be demanded in the next period.
There would be neither an excess inventory nor a shortage at the end of any given period.
c) Uncertain demand with a probability distribution as to the demand of the next period, ie. a situation wherein there is a
probability distribution of demand but we do not have perfect information about the outcome. The decision about the size
of the order to be placed will be taken keeping in view the Expected Monetary Value (EMV) criterion or the Expected
Opportunity Loss (EOL) criterion or by applying the marginal analysis approach to decision making.
2 Inventory Control with Reordering and Certain Demand
Quite often, inventory items may be recorded as the stock runs low and we are not restricted to placing only one order in
a particular time cycle. Two issues are considered
a) What should be the size of the order?
b) When should we place an order?
The assumptions are
i) Demand for the item is at a constant rate and is known in advance
ii) The lead time i.e the time between the placement of order and its receipt is known
iii) Set up cost is a fixed amount per lot and does not vary with lot size
iv) The unit price is constant
v) Minimum inventory is zero units
vi) Storage cost and other costs constituting inventory carrying cost vary directly and linearly with the rise of the inventory and are generally computed on average inventory.
Kelvin kinuthia answered the question on May 11, 2019 at 07:39
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