5. Explain the impacts of order cycle time length and variability on both buyer

Question

5. Explain the impacts of order cycle time length and variability on both buyer and sellers.

6.Explain why inventory costs and inventory levels have declined relative to GPD over the last 20 years. Is it beneficial to the economy? Why or why not.

7. What are the major components of inventory carrying cost? How would you measure capital cost for making inventory policy decisions?

8. How can inventory carrying cost be calculated for a specific product? What suggestions would you offer for determining the measure of product value to be used in this calculation?

9. Explain the differences between inventory carrying costs and ordering costs.

10. Why is it usually more difficult to determine the cost of lost sales for finished goods than it is for raw materials inventories.

Explanation / Answer

5) Order cycle time length is the time taken from order placed till the receipt of order by the customer. From sellers perspective,the variability impacts the frequency of the orders placed by the customer. From buyers perspective , it impacts the safety stock and inventory management. So if for example a seller takes 5 days to deliver a product after receiving the order and demand of the product would be 5 units per day then a safety stock of 25 (5*5) units is required and a reorder would be placed at this level. If the time taken by seller is 4 days then safety stock requirement would be (4*5) 20 units. The requirement of safety stock fell down to 5 units for the buyer and reorder placed earlier than the previous scenario for the seller.

6) The inventory costs and levels have been declined compared to GDP due to technological and industrial development. Outsourcing , Just in Time inventory etc methods have evolved where it is no more required to keep huge stock rather inventory can be procured based on demand. It is beneficial for the economy since it brings down the costs for the company and would help to boost profits which would again enter economy in the form distributed profits to stakeholders.

7) The four major components of carrying cost are capital costs i.e money tied up in inventory , storage space cost such as rent of the warehouse etc, service cost such as insurance of the inventory and inventory risk cost such as theft, reduced demand /price. To calculate the capital costs, sum total of costs incurred to aquire the inventory is added with opportunity cost of purchasing inventory and lost interest on cash foregone to aquire inventory.

8) The inventory carrying cost of a specific product can be computed by the formula:

(Total carrying costs of individual components in the product + direct costs of the product)/Annual inventory costs.

Product value can be computed by adding cost of goods sold to the direct of the product. Cost of goods sold such as overhead expenses and other costs involved in the distribution

9) Inventory carrying costs are incurred to carry the cost which includes capital cost , risk cost, service cost and storage space cost , whereas the ordering cost is incurred everytime an order is placed with the supplier such as transport cost, order placing cost.

10) The cost of lost sales of raw material inventories is easier to identify since it depends mostly on safety stock and inventory carrying costs .whereas the cost of lost sales for finished goods involved many more variables. It depends on sales lost due to stockouts and hence is dependent on accurate demand prediction which could be prone to error.

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