Question

Consider a supermarket deciding on the size of its replenishment order for Tide laundry detergent.

What costs should it take into account when making this decision?

How do these costs for the supermarket change if it were to decreases the lot size for Tide that it ordered from Proctor and Gamble?

Answer 1

For the replenishment of the order the costs that need to be considered are:

• Purchase cost, which depends on the volume as discounts for higher volumes are present.
• Ordering cost, the number of time demand is replenished the times cost of replenishment.
• Holding cost, the cost of keeping the stock shelfed and stored, as extra stock remains lying

The above costs get impacted if the lot size is decreased in the following manner:

Purchase cost: Goes up as the discounts decrease

Ordering cost: Goes up as the demand remains same the number or orders to replenish goes up.

Holding cost: Reduces, as the stock is less and so the cost for display volume and storage is reduced.