Contd...

Ordering/Production Cost : The ordering and production costs may just be the function of the order quantity and in general includes set up cost along with production cost (which may be either increasing or decreasing). Depending on the mathematical property of the cost of production this cost function may be convex/concave or more general in nature. One should note that the set up cost may include some sort of opportunity cost also, where this opportunity cost may be exogenous or dictated by other external variable function in the model (i.e., it is endogenous). The ordering cost can also include cost to change the level of production and hence becomes a function which is no longer dependent on order quantity only.

Holding : Holding costs includes costs such as physical holding costs, financial holding costs, etc. These costs in general account for the opportunity cost of capital which is blocked for holding an inventory. Depending on circumstances pilferage, obsolence, spoilage, defects, etc., may also be considered under the concept of holding cost.

Shortages : As described above, shortages costs influences the decision making for production system as well as of the supply chain system. It may also be possible that future demands may be affected by shortages and hence effective planning and strategies would be required while designing a production system or a supply chain management network such that the effects of shortages are minimized.

Supply : Supply of goods can be deterministic or stochastic. Apart from that we may have a supply which varies with time but is predictable. The quantum of goods to be supplied depends on many factors, amongst which demand of goods required may be considered as significant. Other important factors which effects demand are ordering policies of other products in case order is being made to a production facility which manufacturer different products, value of lead time of orders, variability in production and the factors affecting the same, etc. Furthermore the actual quantum of goods which is delivered may differ from the quantum of order or supply made as there may be pilferage, wastage, quality deterioration, etc.

Physical System : By the word physical system we mean the facilities which are used for the production and manufacturing. Depending on the location of the facilities one can have series, parallel or arborescence types of facilities. In case one has different products in the production process, and if all or some of the products use same or similar types of facilities like machines, etc., then planning for the physical system for an efficient production set-up becomes very important.

Information Structure : By the word information structure we mean the sytem in place through which we collect the data, collate it, process the same and then utilize it for use in the production system. This information system should be designed keeping in mind whether we have a continuous or a periodic review system. Information related to demand of the product, its production or transportation costs, etc., all can be gathered from the information system if designed properly.

Resource usage : Apart from raw materials, labour, etc., there may be other resources which are used for the prodution and manufacturing process. Few examples are electricity, transportation, grinding tools, coolant, etc. Hence the aim is to use all these resources judiciously so that wastages are minimized while at the same time the objective(s) of the production/manufacturing process is/are met as per the desired level.