Question

a) Think of yourself as a Walmart manager. You need to decide on the size of your replenishment order from Wilson Sporting Goods. What costs should you take into account when making this decision?

b) How do your costs identified in part a change if you decrease the lot size ordered from Wilson Sporting Goods?

c) It is around Labor Day weekend. US Open is in full swing. You know that this time of the year your demand for tennis racquets increases. How do your costs identified in part a change in this situation assuming you are increasing your lot size to meet the anticipated demand?

d) Now that your demand is high and your lot size order has changed, how would you expect your cycle inventory to change?

Answer 1

a) Costs considered are: inventory holding costs, ordering costs and the price of the goods

b) If we decrease the lot size, then average inventory decreases and hence holding costs decreases while number of orders goes up which increases ordering costs.

c) With increase in average inventory, the inventory holding costs increases and number of orders may remain same. Thus overall costs increases.

d) The cycle inventory would increase because of increase in order size as overall average cycle inventory is given by Order size/2