Inventory Management Ch7 Pt2

• What are ordering costs in inventory management?

  Costs paid to place an order from a supplier
• What are the components included in ordering costs?

  Transport/delivery, labour costs for placing, checking, and moving/packing orders
• What costs are excluded from ordering costs?

  The cost of goods being ordered
• What are the two components that make up ordering costs?

  A fixed cost and a variable cost
• How does the fixed cost component of ordering costs behave?

  It remains the same for any order placed by the business
• How do variable costs in ordering costs behave?

  They vary depending on the number of purchase orders processed
• What are inventory holding costs associated with?

  Storing goods
• What are some examples of inventory holding costs?

  Warehouse costs, insurance, staff, equipment, water, and electricity
• What happens to ordering costs when holding costs go up?

  Ordering costs go down
• What does ordering less frequently imply for stock holding?

  It means holding more stock
• What is the goal for firms regarding stock levels?

  To order the right level of stock to reduce ordering and holding costs
• What does EOQ stand for and what does it tell retailers?

  • EOQ stands for Economic Order Quantity
  • It tells retailers how much quantity to order
  • Aims to minimize ordering and holding costs
  • Ensures the right amount is ordered, not too much or too little
• What are the two costs used in the EOQ calculation?


  Ordering costs and holding costs
• What is the formula for calculating EOQ?

  $Q =$$\frac{2DS}{H}$
• In the EOQ formula, what does D represent?

  Annual demand
• In the EOQ formula, what does S represent?


  Setup costs or ordering costs
• In the EOQ formula, what does H represent?

  Holding costs
• If a shoe retailer sells 100 boots a month, what is the annual demand?

  1200 boots
• If the holding cost is 10% per unit and the boots cost R450.00 each, what is the holding cost per unit?

  R45.00
• Calculate the EOQ for the shoe retailer using the provided data.

  52 boots
• What does the EOQ of 52 boots mean for the shoe retailer?

  It indicates the optimal order quantity to minimize costs
• What is the EOQ calculation task for the music retailer?

  • Annual demand: 300 LPs per month
  • Cost per LP: R70.00
  • Holding cost: 10% per unit
  • Ordering cost: R60 per unit
  • Calculate EOQ and explain its meaning
• What is the EOQ calculation task for the bag retailer?

  • Annual demand: 500 bags per month
  • Cost per bag: R200.00
  • Holding cost: 10% per unit
  • Ordering cost: R40 per unit
  • Calculate EOQ and explain its meaning
• What does JIT stand for in inventory management?

  Just In Time
• What is the main aim of the Just In Time (JIT) inventory strategy?

  To hold little or no inventory
• When does a business using JIT order stock?

  Only when items are sold or items are to be made
• What are the benefits of JIT inventory management?

  • Improved warehouse costs
  • Frees up space in the warehouse or shop floor
  • Frees up money for other business uses
  • Less dead stock
  • Saves on holding material costs
• What are the disadvantages of JIT inventory management?

  • Dependency on suppliers for timely delivery
  • Risk of stock outs due to sudden demand increases
  • Requires a good ERP system for effective communication