Scenario 9.1
Shipments of Product A from a distribution center to a retailer are made in lots of 350. The retailer's average demand for Product A is 75 units per week. The 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 350 units per shipment.
-Refer to Scenario 9.1. The net impact on the retailer will be:
A) no net change in average cycle and pipeline inventories.
B) a net average increase in cycle and pipeline inventories of 50 units.
C) a net average decrease in cycle and pipeline inventories of 75 units.
D) a net average decrease in cycle and pipeline inventories of 50 units.

Question

Quizplus · Accepted Answer

Currently, the retailer's cycle inventory is 350 units, which is the same as the lot size. The pipeline inventory is the average demand during the lead time, which is 3 weeks x 75 units/week = 225 units.

If the retailer agrees to purchase 400 units per shipment, the new cycle inventory will be 400 units. The new lead time is 2 weeks, so the new pipeline inventory will be 2 weeks x 75 units/week = 150 units.

The net impact on the retailer's inventory will be a decrease of 50 units [(350+225) - (400+150) = 75 - 400 = -50]. Therefore, the correct answer is D: a net average decrease in cycle and pipeline inventories of 50 units.

Scenario 9.1 Shipments of Product a from a Distribution Center to a to a Retailer