Question

Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler's average demand for X is 100 units per week. Lead time from plant to wholesaler is 4 weeks. The wholesaler pays for the shipments when they leave the plant.
Refer to the instruction above. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size, what is the wholesaler's new total cycle plus pipeline inventories?


A) 300 units

B) 500 units

C) 700 units

D) 200 units

Answer 1

Answer:

Option (B) is correct.

Explanation:

Given that,

Lot size = 600

Average demand per week = 100 units

Lead time = 4 weeks

Cycle inventory is determined by dividing the lot size by 2. It is calculated as follows:

= Lot size ÷ 2

= 600 ÷ 2

= 300 units

Pipeline inventories is determined by the product of average demand and lead time from plant to wholesaler.

Pipeline inventories:

= Average demand × Lead time

= 100 × 4

= 400 units

Hence, Total cycle + Pipeline inventories = 300 units + 400 units

                                                        = 700 units

Now, if the plant reduces its lead time from 4 to 2 weeks and lot size remains the same, then

Cycle inventory:

= Lot size ÷ 2

= 600 ÷ 2

= 300 units

Pipeline inventories:

= Average demand × Lead time

= 100 × 2

= 200 units

Hence, New Total cycle + Pipeline inventories = 300 units + 200 units

                                                                             = 500 units