Discussion Ch 10 Chopra & Meindl
CHAPTER TEN Discussion Questions
1. Consider a supermarket deciding on the size of its replenishment order from Proctor & Gamble. What costs should it take into account when making this decision?
The main cost categories for the supermarket’s inventory policy are material costs, ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for the goods themselves. Ordering costs, also called procurement costs, are incurred by requesting the goods from the supplier and are fixed in the sense that they do not vary with the size of the order. Examples of such fixed costs are the labor required to place the order, handle the resultant paperwork and the transportation fee to ship the order. The holding cost is the cost to carry one unit in inventory for a specified period of time, usually one year. This cost is variable and includes the cost of capital and all of the costs associated with physically storing inventory – shrinkage, spoilage or obsolescence, insurance, the cost of capital, the cost of the warehouse space, etc.
2. Discuss how various costs for the supermarket change as it decreases the lot size ordered from Proctor & Gamble.
As the lot size ordered from the supplier decreases, the holding cost (variable with respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same, but the annual ordering cost will rise since the total number of orders each year must increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but will stay the same on an annual basis since total annual demand hasn’t changed. The exception to this occurs if the supplier has a price break for an order size above a certain threshold; in this case the cost of the goods might increase if the reduced order size is not sufficient to trigger a substantial per unit discount.
3. As demand at the supermarket chain grows, how would you expect the
1. Consider a supermarket deciding on the size of its replenishment order from Proctor & Gamble. What costs should it take into account when making this decision?
The main cost categories for the supermarket’s inventory policy are material costs, ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for the goods themselves. Ordering costs, also called procurement costs, are incurred by requesting the goods from the supplier and are fixed in the sense that they do not vary with the size of the order. Examples of such fixed costs are the labor required to place the order, handle the resultant paperwork and the transportation fee to ship the order. The holding cost is the cost to carry one unit in inventory for a specified period of time, usually one year. This cost is variable and includes the cost of capital and all of the costs associated with physically storing inventory – shrinkage, spoilage or obsolescence, insurance, the cost of capital, the cost of the warehouse space, etc.
2. Discuss how various costs for the supermarket change as it decreases the lot size ordered from Proctor & Gamble.
As the lot size ordered from the supplier decreases, the holding cost (variable with respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same, but the annual ordering cost will rise since the total number of orders each year must increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but will stay the same on an annual basis since total annual demand hasn’t changed. The exception to this occurs if the supplier has a price break for an order size above a certain threshold; in this case the cost of the goods might increase if the reduced order size is not sufficient to trigger a substantial per unit discount.
3. As demand at the supermarket chain grows, how would you expect the