Use the following to answer the questions below.
Shipments of Product A from a distribution center to a retailer are made in lots of 350.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 350.
-Refer to the instruction above.The net impact on the retailer will be:

Question

Quizplus · Accepted Answer

The current lead time is 3 weeks and the lot size is 350. Therefore, the average cycle inventory is (350/2) = 175 units. The average pipeline inventory is (75x3) = 225 units. So, the total average inventory is 400 units.

If the retailer agrees to purchase quantities of 400 per shipment, the lead time will be reduced to 2 weeks. Therefore, the average pipeline inventory will be reduced to (75x2) = 150 units. However, the lot size will be increased to 400 units, which means the average cycle inventory will increase to (400/2) = 200 units.

So, the net impact on the retailer's inventory will be a decrease of 50 units [(225-150)-(200-175)= -50]. Therefore, the correct answer is D.

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