Question

Define and explain the different types of inventory costs that managers must consider in making replenishment decisions.

How can these costs be determined in practice? How does order cost differ from setup cost?

what is a SKU? Provide some examples in both goods and services.

Explain the difference between independent and dependent demand, deterministic and stochastic demand, and static and dynamic demand. Provide an example of an inventory item for each combination of these demand types (e.g., independent, stochastic, and static, and so on).

Define lead time. What factors affect lead time?

Describe the two different types of stockouts that firms often face. What must be done to prevent them?

Answer 1

Inventory cost includes the price that was paid to purchase an item ,the cost of storing and maintaining that item for however long it takes it to sell. The different csot that a prson should keep in mind while making replenisgment decesion are

• ordering costs
• carrying costs and
• shortage costs.

Order cost is basically the cost of the goods ordered where as Setup costs refer to all of the costs associated with actually ordering the inventory, such as the costs of packaging, delivery, shipping, and handling.

SKU( Stock keeping unit)  can also refer to a unique identifier or code that refers to the particular stock keeping unit.

Independent demand is the demand for he final product for example demand for the car where as dependent demand is the demand for the component of the final product for example tyre for the car.

Deterministic demand is the demand where the actual quantity of goods demanded is known for example 4 tyre for car stocastic demand is the demand where the demand is calculated on the basis of expected value for example to travel 10 km 1 liter or 2 liter of oil may be required.

Static demand does not change due to change in the condition whereas dynamic demand changes due to changes in the condition .

Lead time is the time between the placing of the order and actual reciept of the order. Factors that affect the lead time are :

• shipping time
• control system over the inventory
• processing time of the product etc.

A stockout is an event that causes inventory to be exhausted. The controls over the inventory system needs to be improved in order to avoid stock outs.