Question

Discuss the assumptions that are inherent in production setup cost, ordering cost and carrying cost. How valid are they?

Answer 1

The assumptions that are inherent in production setup cost, ordering cost and carrying cost are stated as follows :-

1. It is inferred or understood that the demand of a stringent product is similar and stable for the entire time period.

2. The lead time which is the time between the initiation and completion of the production process must be a constant.

3. Demand for items from inventory is continuous and at a constant rate.

4. Production set-up/ordering cost is fixed independent of quantity produced.

5. The holding cost of inventory mostly depends on average inventory.

6. The purchase price of the item is constant, that is, no discount is available.

7. Demand rate is known, continuous and constant.

8. Production rate is equal to or greater than demand rate.

9. Set-up cost is an increasingly continuous function of the production rate.

Assumption #4 does not accurately reflect the reality since it can often be observed that the unit production cost and set-up cost depend on the production rate.