Shipments of Product A from a distribution center to a retailer are made in lots

Question

Shipments of Product A from a distribution center to a retailer are made in lots of 375. The retailer's average demand for A is 75 units per week. Lead time from distributor to retailer is 3 weeks. The retailer pays for the shipments when they leave the distributor. The distributor has agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of 400 per shipment instead of 375 With the change in lead time and the increase in purchase quantity the overall inventory will: A. decrease by 75 units. O B. decrease by 25 units. O C. increase by 25 units. 0 D. decrease by 50 units.

Explanation / Answer

In the existing scenario:

Weekly demand = 75

Lead time = 3 weeks

Lot size = 375

So, the lot size is equivalent = 375/75 = 5 weeks

Thus, demand is perfect and there will be 0 inventory at the end

New Lot size = 400

Lead time = 2 weeks

So, the lot size is equivalent = 400/75 = 5.33 weeks

In this case, there is excess of 25 units which will be left every time.

Ans: C

It will increase the inventory by 25 units

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