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A lead time is the time gap between ordering and receiving goods.
For example, we may be interested in the average weight of Pepsi bottles.
Let us assume that the average weight is designed to be 12 ounces in each bottle.
Accordingly, in most cases a representative random sample from the production run is taken and tested and conclusions drawn about the production lot on the basis of the results obtained from the sample.
One technique that is available for such type of quality control is known as, “Statistical Quality Control”.
However, it is not economically feasible to inspect every item produced.
Every car cannot be crashed to test if it can withstand an accident at 10 miles per hour speed.The inventory carrying costs are the costs associated with holding the items in storage for future use.Some of the carrying costs are: the cost of capital tied up, insurance premiums on inventory, possibility of obsolescence, possible pilferage of stock, deterioration and damage to goods, storage space costs and storage labour costs.Fourth rejecting the entire lot on the basis of simply sample testing can motivate the suppliers of the product to improve their quality control standards and procedures.Finally, it is the only approach in situations where quality is tested by destroying the item.While the cost of being out of stock is comparatively intangible in terms of loss of customer goodwill and potential sales, the inventory carrying costs are fairly quantifiable.There are basically two types of costs associated with inventories. The ordering costs are associated with time, effort and money involved in ordering the inventory items.Statistical quality control is a set of statistical techniques designed to indicate whether or not the quality of the product is under control and within the acceptable limits.The process involves sampling and construction of statistical control charts against which the sample parameters are measured.Since, by law of nature all finished goods are not going to be exactly the same, some limits or tolerances must be set so that if the finished product falls within these set limits, then it can be considered of acceptable quality. The process of taking a random sample of predetermined size from the production lot and determining the acceptance or rejection of the lot on the basis of sample measurements is known as “acceptance sampling”.Acceptance sampling is simply a statistical method which enables us to make the decision of either accepting or rejecting the entire lot based upon the inspection of a sample of items from the lot. First, it is more economical as compared to 100 percent inspection, in terms of inspection costs.