004201905060 – Decky Febryan

Question

1. Consider a supermarket deciding on the size of its replenishment order from Procter &
Gamble. What costs should it take into account when making this decision?
Answer :
The main cost categories for the supermarket’s inventory policy are material cost,
ordering cost, and holding cost. Material cost is the money paid to proctor and Gamble for
the goods themselves. Ordering cost, also called procurement cost, are incurred by
requesting the goods from the supplier and are fixed in the sense that they do not vary
with the size of the order, handle the resultant paperwork and the transportation fee to the
ship order. The holding cost is the cost carry one unit in inventory for a specified period of
time, usually one year. This cost is variable and includes the cost of capital and all of the
cost associated with physically storing inventory – shrinkage, spoilage or obsolescence,
insurance, the cost of capital, the cost of the warehouse space, etc.

2. Discuss how various costs for the supermarket in Question 1 change as it decreases the lot
size ordered from Procter & Gamble.
Answer :
The above two types of fees vary with the order or lot size.
As the volume of supermarket orders decreases, the following content:

 Variable material cost: As the total order quantity of each order decreases, the material
cost of each order will also decrease. However, as the number of economic orders
decreases, the variable cost per unit increases because suppliers usually discount orders
above a certain threshold. On an annual basis, it will remain the same because there is no
change in total annual demand.
 Inventory holding costs: With variable material costs, storage costs associated with a
given lot decrease. But in the long run, it has no effect every year.
 Fixed ordering cost: As the name implies, ordering cost will not change with the
quantity. However, on an annual basis, as the number of orders for the same request
increases each year, the cost of the annual order will increase.

3. As demand at the supermarket chain in Question 1 grows, how would you expect the
cycle inventory measured in days of inventory to change? Explain.

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Answer :
Inventory cycle: Inventory cycle is defined as the average inventory of certain items that
are higher than customer demand. Due to the high customer purchase turnover rate, the
supermarket's demand increases, and the inventory cycle in days is shortened. Higher
demand minimizes the need to frequently track inventory of each product. When demand
is strong, the inventory period of each product is also shortened.

4. The manager at the supermarket in Question 1 wants to decrease the lot size without
increasing the costs he incurs. What actions can he take to achieve this objective?
Answer :
Managers can work wonders in their economic order quantity model. Because the total
"Q" cost curves on both sides of the EOQ model remain flat, changes on either side will
have little impact on the costs.
Managers can choose to order multiple products in one order. Since the EOQ concept is
based on one product at a time, if several products are combined, the purchase cost will
cover all products and the batch size can be reduced. If several stores in the same chain
can order the same product, then one truck is enough to transport all the products and
reduce transportation costs.
And managers can also include advance notification to shipping companies, which will
help make warehouse management and inventory tracking easier.

5. Discuss why supply chain profits may be hurt by a retailer making lot-sizing decisions
with the sole objective of minimizing its own costs. What advantage would result if the
entire supply chain could coordinate this decision?
Answer :
Supply chain management:
It is the process of managing and planning business activities, such as purchasing,
converting, and delivering goods through appropriate distribution channels. The core
purpose of this process is to create added value for the enterprise.
For the following reasons, the sole purpose of retailers making batch size decisions is to
minimize their own costs, which may harm the supply chain advantage:
 Supply chain profit will reflect the retailer’s order quantity, as they charge the charger
for each shipment

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 Bulk purchases play an important role, because compared with small-batch purchases,
bulk purchases from retailers gradually reduce the profit prospects of the supply chain
 On the other hand, retailer orders are related to market demand. The purchased products
are sent directly to the customer's market. The fluctuations they see will also affect the
profits of the supply chain, because retailers tend to reduce orders to obtain profits.
The advantages that will lead the entire supply chain to participate in decision-making are
discussed as follows:
 Collaborative decision-making will help to make wise planning of the entire supply
chain process, and perform resource scheduling as efficiently as possible.
 Through planning and forecasting and optimized utilization of resources, the fluctuation
of the supply and demand function can be effectively dealt with
 Production costs will be controlled, supply will be on demand, and overall, profitability
results at all levels
Therefore, coordinated supply chain activities will be fruitful, progressive and profitable.

6. When are quantity discounts justified in a supply chain?

Answer :
The quantity discount in the supply chain is reasonable under the following
circumstances:
 Productivity generated from the coordinated supply chain to ensure that the total supply
chain profit is maximized
In the case of Dalam merchandise products, manufacturers’ use of volume-based quantity
discounts tends to increase their profits. Therefore,
 This is reasonable when the goal is to maximize profit and price discrimination is used
as a factor
In addition, encourage continuous and sustainable commercial transactions and quantity
discounts to maintain good relationships with all levels of the supply chain

7. What is the difference between lot size–based and volume-based quantity discounts?
Answer :
Lot size–based
Lot size–based are not based on the purchase rate, but on the quantity purchased. This
method increases the batch size and therefore helps increase the cycle inventory of each

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process. This discount is especially useful when the manufacturer incurs high fixed costs
on the order. In order to maximize the supply chain profits of goods with high fixed costs
and market-determined prices, manufacturers can use the volume discount method.
Volume-based
Quantity-based discounts can be used for discounts that depend on the quality of the
purchase or the level of purchase within a given time. This tends to reduce periodic
inventory and is suitable for small batches. When the fixed cost of the order is low,
quantity-based discounts are preferred. When a company has superior power in its
products, it can achieve supply chain coordination and high profits through quantity-based
discounts.

8. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What impact
do trade promotions have on the supply chain? How should trade promotions be
structured to maximize their impact while minimizing the additional cost they impose on
the supply chain?
Answer :
Manufacturers such as Kraft and Sara Lee provide trade promotions because they provide
companies with several advantages. They are as follows:
 Trade promotion helps companies differentiate their products in a highly competitive
market,
 It helps the company increase the brand awareness of customers and increase product
awareness.
 This type of promotion helps to increase the consumption rate of the product and the
average number of customers using the product.
The impact of trade promotion on the supply chain is as follows:
 Every manufacturer hopes to continuously display their products in the retail market.
Trade promotion helps retailers improve their brands through display, display, and price
reduction.
 Trade promotion helps manufacturers encourage retailers to remove their products from
the shelves.
In order to minimize additional costs:
 Manufacturers should lower the prices of retailers in order to provide customers with
low prices, thereby helping to reduce the cost of the entire supply chain.

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9. Why is it appropriate to include only the incremental cost when estimating the holding
and order cost for a firm?
Answer :
The incremental cost refer to costs that change as the batch increases or decreases. When
estimating the holding and ordering costs of a company, these costs must be correctly
estimated to avoid spending a lot of time to estimate correctly. Inventory cost is a
percentage of product cost and is the sum of its components, including capital cost,
damage cost, handling cost, and occupation cost. The order cost is the total cost incurred
when the order is placed, and has nothing to do with the batch size such as purchase time,
transportation cost, and acceptance cost.

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