Definitions of various aspects of an inventory model
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What are precise definitions of stock out costs, carrying costs, order quantity issues, safety stock and EOQ issue?
How do these effect a firms operations?
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The solution response discusses definitions of stock out costs, carrying costs, order quantity, safety stock and EOQ.
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The definitions are
Stock out costs: First let me define it in terms of finished goods inventory. The costs incurred by a company for not fulfilling the customer demand. This results due lost sales and dissatisfied customers. Primarily this stockout cost is due to not fulfilling customer demand due to non-availability of goods as finished products. Stockout cost is aslo incurred due to unavailability of raw materials or sub-assemblies. The cost of unsatisfied demand incurred due to unavailability of raw materials is also a stockout cost
To avoid these costs companies carry inventory in the form of finished goods, raw materials and sub-assemblies. This effects in inventory carrying costs
Carrying cost: The cost incurred by a company for carrying inventory is carrying cost. This include interest on debt, interest income forgone, warehouse rent for storing inventory, cooling-heating so that inventory does not become unusable, lighting at warehouse, cleaning of warehouse, repairing, protecting against theft and pilferage, shipping, receiving, material handling, taxes, insurance and management costs incurred on above activities.
This is why ...
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