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Q. 20-3DQ-a

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Operations And Supply Chain Management
Found in: Page 543
Operations And Supply Chain Management

Operations And Supply Chain Management

Book edition 14th
Author(s) F. Robert Jacobs
Pages 800 pages
ISBN 9780078024023

Short Answer

Discuss the nature of the costs that affect inventory size. For example a. How does shrinkage (stolen stock) contribute to the cost of carrying inventory? How can this cost be reduced?

Three expenses influence inventory size: purchase costs, ordering costs, and holding costs.

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Step by Step Solution

The nature of the costs that affect inventory size

Based on the quantity ordered, the purchase cost influences the inventory size. Discounts are given based on the amount bought, which implies that suppliers will give companies a substantial discount if they place a large order. It also aids in growing the amount of inventory.

The optimum order quantity is directly affected by the ordering cost, i.e., if the ordering cost increases, the order frequency decreases. The holding costs harm inventory size; if the holding cost is large, the company will choose to store less inventory.

Shrinkage (stolen stock) contributes to the cost of carrying inventory

Inventory risk cost refers to the cost spent as a result of the risk involved with carrying inventory, which includes shrinkage risk. Shrinkage is the loss of things while in storage that are no longer associated with sales.

This shrinkage is frequently caused by administrative errors such as shipping issues, lost items, out-of-date systems, and so on, or by theft, including staff theft, or damage in transit. This shrinkage cost may be decreased with correct management methods, ongoing audits, physical stock verification, and logistics team maintenance activities.

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