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Sem 5 Prep
← OperationsInventory: types, functions and costs

Formulas for this chapter

Annual holding cost

Annual holding cost = (Q / 2) x H

Whenever stock runs down evenly from Q to zero. Q/2 is the average inventory over the cycle.

Q
Order quantity in units
H
Holding cost per unit per year; convert from a percentage of price first

Annual ordering cost

Annual ordering cost = (D / Q) x S

D/Q is the number of orders placed a year. Ordering cost never depends on how big each order is.

D
Annual demand in units
S
Ordering cost per order, or setup cost per run

Holding cost from a percentage

H = carrying charge % x unit price

The first line of almost every inventory numerical. Do it before touching Q.

carrying charge %
Annual carrying cost as a fraction of inventory value, e.g. 0.09
unit price
Cost of one unit
Step 1 of 20
The ideaTheory

The cupboard problem

Buy rice once a year and you save trips, but you tie up money and fill the cupboard. Buy it every week and the cupboard is empty and the money is free, but you are always at the shop.

Every inventory decision is that trade-off: fewer, bigger orders against more, smaller ones.

The next four chapters are the same question with more arithmetic each time. This one sets up the vocabulary and the costs.

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