PROBABILITY

Is the chance that something will

happen
 ECONOMIC ORDER QUANTITY
is the size order which minimizes the
total annual cost of ordering and
carrying inventory

• ORDERING COSTS- costs of getting an item

into the firm’s inventory.
• CARRYING COSTS- holding costs
 No. of orders per year:
• Square root of:
• AC
2P
 Optimal number of days’ supply per
order
• 365 times the square root of
• 2P
AC
 Optimal number of dollars per order
• Square root of
• 2AP
C
Optimal number of units per order
• Square root of
• 2AP
R raised to the 2nd power times C
 LEAD TIME
• SAFETY STOCK- refers to extra inventory held
as a hedge, or protection, against the
possibility of a stockout. It will decrease the
costs of stockouts but increase carrying costs.
 ANNUAL STOCK OUT COST
• NO. OF SHORT * PROBABILITY OF BEING
SHORT THAT MNY *COST OF BEING OUT PER
UNIT * # OF ORDERS PER YEAR
 REORDER POINT
• AVERAGE DAILY USE * Lead time + Safety
Stock