EXERCISE 5:

1. What should the firm do to avoid shortages of inventories? Explain.

The firm may employ service level inventory. It represents expected probability
of not hitting a stock-out in which the percentage is required to compute safety stock.
Apart from this, the following should be able to do the following processes. First the firm
must be able to distinguish common causes of shortages or stock-outs. These causes
include inaccurate inventory data, poor forecasting, demand variability, poor monitoring
and inefficient processes. Upon knowing these causes, the firm must eliminate the
uncertainty caused by inadequate forecasting and lengthy lead time which are key
contributors to stock-outs. The solution to these uncertainties is to gain better control and
have enough knowledge of stock needs.
Additionally, the firm should be willing to invest in inventory
management. This aids in attaining better visibility, limiting inventory movement,
improving record accuracy, reducing lead times, and lowering need for safety stock.
Lastly, part of the solutions to inventory shortages are: mastering the firm’s lead
time is also part of solutions to inventory shortages, calculating reorder points, using
accurate demand forecasting, and maintaining accurate stock levels.

2. How a price discount can affect decision on inventory purchases? Explain.

Discount is a reduction in price offered by seller on orders of large quantities
and exists in different forms and in certain scenarios they may not be obvious. This affect
the decision of purchaser in a way that its effect in income is analyze. Discounts affect
income through savings from reduced price, reduced ordering costs, and loss from
increased total holding costs. Usually, the decision is affected only if the effect of
purchasing on a price discounted items will give a positive impact to the purchaser.