A supplier is offering a price discount if more is ordered at one time. The offer should be analyzed to determine if a larger order is appropriate considering: the impact of the
A.
increase in average inventory levels on ABC designations.
B.
the reduction in material cost compared to the impact on total holding costs.
C.
the impact of additional items on indirect costs,
D.
the increase in transportation costs compared to the reduction in ordering cost.
When analyzing a supplier's offer for a price discount contingent on larger order quantities, it's essential to evaluate the trade-off between the reduced material costs and the increased holding costs. This analysis should consider factors such as additional storage space, insurance, obsolescence risks, and capital tied up in inventory. If the savings from the discounted price exceed the additional holding costs, it may be beneficial to place larger orders. Otherwise, the cost savings might be negated by the increased carrying costs. This comprehensive evaluation ensures that the decision aligns with overall cost-efficiency and supply chain strategy.
References
"Inventory Management and Production Planning and Scheduling" by Edward A. Silver, David F. Pyke, and Rein Peterson
APICS Operations Management Body of Knowledge Framework
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