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Chapter 4: Q4DQ. (page 543)

Question: Under which conditions would a plant manager elect to use a fixed order quantity model as opposed to a fixed鈥搕ime period model? What are the disadvantages of using a fixed鈥搕ime period ordering system?

Short Answer

Expert verified

Answer

Two strategies are used to control inventory and production. They have a defined order quantity and a fixed time. A standard quantity of inventory is ordered when it reaches the reorder point in the case of a fixed order quantity model, and an order is made during the period of review to raise the level of inventory above the goal level in the case of a set period model.

Step by step solution

01

Under the following conditions, the fixed order quantity model is used

  1. Items that are thought to be rapidly moving.
  2. Items with a high monetary worth cannot be held as inventory.
  3. If the items are very critical then they would be managed under fixed order quantity model.
02

Disadvantages of using a fixed-period ordering system

  1. The defined period cannot be used in an emergency since inventory is only reviewed within a specific period.
  2. Similarly, because of the set duration review, this technique is inadequate for crucial issues.
  3. This strategy also has greater inventory than the fixed order model.

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Most popular questions from this chapter

Zeus Computer Chips, Inc., used to have major contracts to produce the Centrino-type chips. The market has been declining during the past three years because of the quad-core chips, which it cannot produce, so Zeus has the unpleasant task of forecasting next year. The task is unpleasant because the firm has not been able to find replacement chips for its product lines. Here is demand over the past 12 quarters:

Two

Yearsago

Last year

This year

I

4800

I

3500

I

3200

II

3500

II

2700

II

2100

III

4300

III

3500

III

2700

IV

3000

IV

2400

IV

1700

Use the decomposition technique to forecast demand for the next four quarters.

Daily demand for a product is 60 units with a standard deviation of 10 units. The review period is 10 days, and the lead time is 2 days. At the time of review, there are 100 units in stock. If 98 percent service probability is desired, how many units should be ordered?

Sally鈥檚 Silk Screening produces specialty T-shirts that are primarily sold at special events. She is trying to decide how many to produce for an upcoming event. During the event, Sally can sell T-shirts for \(20 apiece. However, when the event ends, any unsold T-shirts are sold for \)4 apiece. It costs Sally $8 to make a specialty T-shirt. Sally鈥檚 estimate of demand is the following:

Demand

Probability

300

.05

400

.10

500

.40

600

.30

700

.10

800

.05

a. What is the service rate (or optimal fractile)?

We have an item that we stock in our store that has fairly steady demand. Our supplier insists that we buy 1,200 units at a time. The lead time is very short on the item since the supplier is only a few blocks away and we can pick up another 1,200 units when we run out. How many units do you expect to have in inventory on average?

Retailers Warehouse (RW) is an independent supplier of household items to department stores. RW attempts to stock enough items for a 98 percent service probability. A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever a new stock is ordered, a buyer must assure that numbers are correct for stock on hand and then phone in a new order. The total cost involved to place an order is about \(5. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about \)4 holding cost per unit per year. Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order in seven days.

a. What is the economic order quantity?

b. What is the reorder point?

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