Shipments of Product Q from a plant to a wholesaler are made in lots of 400.The wholesaler's average demand for Q is 150 units per week.Lead time from plant to wholesaler is 5 weeks.The wholesaler pays for the shipments when they leave the plant.The plant has proposed several new lead time and lot size options to the wholesaler (see table below).If the wholesaler's goal is to minimize total cycle plus pipeline inventories,which option should the wholesaler select?

Question

Quizplus · Accepted Answer

To minimize total cycle plus pipeline inventories, we need to find the option with the lowest total inventory cost (cycle inventory + pipeline inventory).

Option 1:
Lot size = 200, Lead time = 4 weeks 
Cycle inventory = lot size/2 = 100 units 
Pipeline inventory = lead time * average demand = 4 * 150 = 600 units 
Total inventory cost = (100*0.5)+(600*0.75) = $525

Option 2:
Lot size = 800, Lead time = 6 weeks 
Cycle inventory = lot size/2 = 400 units 
Pipeline inventory = lead time * average demand = 6 * 150 = 900 units 
Total inventory cost = (400*0.5)+(900*0.75) = $937.50

Option 3: 
Lot size = 400, Lead time = 5 weeks
Cycle inventory = lot size/2 = 200 units
Pipeline inventory = lead time * average demand = 5 * 150 = 750 units
Total inventory cost = (200*0.5)+(750*0.75) = $662.50

Remain with current option: 
Lot size = 400, Lead time = 5 weeks
Cycle inventory = lot size/2 = 200 units
Pipeline inventory = lead time * average demand = 5 * 150 = 750 units
Total inventory cost = (200*0.5)+(750*0.75) = $662.50

Based on the calculations, option 3 has the lowest total inventory cost, and hence, the wholesaler should select option 3 to minimize their inventory costs.

Shipments of Product Q from a Plant to a Wholesaler