# which of the following is not true for the foq gradual replenishment model?

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## P370 Final: Topic 2 Flashcards

Inventory Control and the basic FOQ model Learn with flashcards, games, and more β for free.

## P370 Final: Topic 2

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Topic 2

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Inventory Control and FOQ basic model

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Types of inventory

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raw material, work-in-process (WIP), and finished goods. Different shareholders for each, like scheduling department is accountable for WIP

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Inventory Control and the basic FOQ model

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Topic 2

Inventory Control and FOQ basic model

Types of inventory

raw material, work-in-process (WIP), and finished goods. Different shareholders for each, like scheduling department is accountable for WIP

4 Reasons for Holding Inventory

Safety Stock -Cycle Stock -Pipeline Stock -Seasonal Stock Safety Stock

a buffer against some form of uncertainty

-typical uncertainties are the amt of demand or the supply of the product (a little bit just in case)

Cycle Stock

due to the supply/source of product is not continuous (you need to stock up)

This occurs because:

1. the process involved requires batching (like oil processing)

2. some resources required must be shared with more than one product (like plastic injection molds)

3. it simply may not be economically efficient to produce the product continuously, and so we choose to produce in batches (you need inventory to last the time it takes you to buy more)

Pipeline Stock

inventory that is located somewhere in the production or delivery processes.

Seasonal Stock

buffer against seasonality/ demand

-you have extra stock bc you know demand will go up

-there is such a lead time-it is hard to foretasted (tied to specific date),

this is used to buffer against demand where safety is used to buffer against uncertainty)

Ways of Measuring Inventory and what is a relative measure

1)# of units

2)Dollar value of units (units*value per unit), driven by stake holder

3)Weeks Supply (units of inventory/weekly demand rate) (relative measure)

4)Inventory Turns (annual sales volume/units of inventory) (relative measure)

relative measure = to compare more than one measure to another

number of units

an absolute measure/physical count. This is something that should always be known , and yet is not very useful from an evaluative standpoint.

dollar value of units

a cost measure. Simply multiply the number of units held in inventory by their value. The choice of value (cost of product or sales value) depends on the context in which the measure is to be used.

weeks of supply

a relative volume measure. Divide the number of units of inventory by the weekly demand rate. This is the inventory equivalent of ROI.

inventory turns

another relative measure. Divide the annual sales volume by the number of units of inventory. Note that this is the inverse of the "years of supply" measure.

Why is inventory an important issue?

1) Material availability - assuring customer orders are met. proper inventory management ensures that materials will be available when needed. Failure to meet demand, whether to the "end-customer" or to the next stage in the production process, can be very costly.

2) INVENTORY COSTS MONEY!!!

what should we due to ensure proper inventory management?

So, we must find a solution that insures customer demand is met while minimizing costs

1) We use Fixed Order Quantity models...

2) Our objective is to determine an appropriate inventory policy that will both achieve a high service level and to reduce costs.

What is an inventory policy and what does it answer?

An inventory policy (EOQ or FOQ model) is the answer to two simple questions.

1) How much should I order? and

2) When should I order it?

To answer this question, we will examine a number of different fixed order quantity models for inventory management. FOQ/ EOQ model

Types of fixed order quantity models

1) Basic fixed order quantity model - demand is constant and the order quantity arrives all at once. IR (instantaneous replenishment)

2) Fixed order quantity model with usage - demand is constant and order quantity is supplied gradually over time. GR

3) Fixed order quantity model with uncertain demand - demand is steady, but uncertain and order quantity arrives all at once. IR

FOQ and Q

fixed order quantity also called EOQ, economic order quantity.

Q should be whatever allows you to minimize costs and Q is a fixed quantity and is ordered when inventory falls below a certain level R

what do we do under the basic FOQ model

We monitor inventory and reorder a fixed quantity when the inventory falls to a predetermined reorder point

Assumptions for the Basic FOQ Model

1) the demand for an item is constant,

2) the item is produced or purchased in lots,

3) decisions for one item are not affected by decisions for another,

4) there is no uncertainty for demand or supply

5) replenishment is instantaneous (whole order is delivered at once), and

6) holding, setup, and purchasing costs are the only relevant costs., this works well with level plans, not so much chase

FOQ, EOQ relevant costs

Holding Costs, Setup, and purchasing

## which of the following is not true for the foq gradual replenishment model?

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## Economic Order Quantity (EOQ) Definition

Economic order quantity (EOQ) is the order quantity a company should make for its inventory given production cost, demand rate, and other variables.

CORPORATE FINANCE & ACCOUNTING ACCOUNTING

Overview TERMS A-B Absorption Costing Amortization

Average Collection Period

Bill of Lading TERMS C Cash Book Cost of Debt Cost of Equity

Cost-Volume-Profit (CVP) Analysis

Current Account TERMS D-E

Days Payable Outstanding

Depreciation

Double Declining Balance Depreciation Method

EBITDA

Economic Order Quantity

TERMS F-M

Factors of Production

Fiscal Year (FY) General Ledger Just in Time (JIT) TERMS N-O

Net Operating Loss (NOL)

Net Realizable Value (NRV)

Noncurrent Assets Operating Cost Operating Profit TERMS P-S Production Costs Pro Forma Invoice Retained Earnings Revenue Recognition Sunk Cost TERMS T-Z

Triple Bottom Line (TBL)

Variable Cost

Work-in-Progress (WIP)

Write-Off

Year-Over-Year (YOY)

Zero-Based Budgeting (ZBB)

## Economic Order Quantity (EOQ)

By JASON FERNANDO Updated March 16, 2022

Reviewed by MICHAEL J BOYLE

Fact checked by SKYLAR CLARINE

## What Is Economic Order Quantity (EOQ)?

Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has been refined over time. The formula assumes that demand, ordering, and holding costs all remain constant.

### KEY TAKEAWAYS

The economic order quantity (EOQ) is a company's optimal order quantity for minimizing its total costs related to ordering, receiving, and holding inventory.

The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time.

One of the important limitations of the economic order quantity is that it assumes the demand for the companyβs products is constant over time.

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### Economic Order Quantity (EOQ)

## Formula for Calculating Economic Order Quantity (EOQ)

The formula for EOQ is:

\begin{aligned} &Q = \sqrt{ \frac{2DS}{H} }\\ &\textbf{where:}\\ &Q=\text{EOQ units}\\ &D=\text{Demand in units (typically on an annual basis)}\\ &S=\text{Order cost (per purchase order)}\\ &H=\text{Holding costs (per unit, per year)}\\ \end{aligned}

β Q= H 2DS β β where: Q=EOQ units

D=Demand in units (typically on an annual basis)

S=Order cost (per purchase order)

H=Holding costs (per unit, per year)

β

## What the Economic Order Quantity Can Tell You

The goal of the EOQ formula is to identify the optimal number of product units to order. If achieved, a company can minimize its costs for buying, delivering, and storing units. The EOQ formula can be modified to determine different production levels or order intervals, and corporations with large supply chains and high variable costs use an algorithm in their computer software to determine EOQ.

EOQ is an important cash flow tool. The formula can help a company control the amount of cash tied up in the inventory balance. For many companies, inventory is its largest asset other than its human resources, and these businesses must carry sufficient inventory to meet the needs of customers. If EOQ can help minimize the level of inventory, the cash savings can be used for some other business purpose or investment.

The EOQ formula determines a company's inventory reorder point. When inventory falls to a certain level, the EOQ formula, if applied to business processes, triggers the need to place an order for more units. By determining a reorder point, the business avoids running out of inventory and can continue to fill customer orders. If the company runs out of inventory, there is a shortage cost, which is the revenue lost because the company has insufficient inventory to fill an order. An inventory shortage may also mean the company loses the customer or the client will order less in the future.

## Example of How to Use EOQ

EOQ takes into account the timing of reordering, the cost incurred to place an order, and the cost to store merchandise. If a company is constantly placing small orders to maintain a specific inventory level, the ordering costs are higher, and there is a need for additional storage space.

Assume, for example, a retail clothing shop carries a line of menβs jeans, and the shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold a pair of jeans in inventory, and the fixed cost to place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding cost) or 28.3 with rounding. The ideal order size to minimize costs and meet customer demand is slightly more than 28 pairs of jeans. A more complex portion of the EOQ formula provides the reorder point.

## Limitations of EOQ

The EOQ formula assumes that consumer demand is constant. The calculation also assumes that both ordering and holding costs remain constant. This fact makes it difficult or impossible for the formula to account for business events such as changing consumer demand, seasonal changes in inventory costs, lost sales revenue due to inventory shortages, or purchase discounts a company might realize for buying inventory in larger quantities.

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