Question 29 - CPIM-Part-2 discussion

A reduction in purchased lot sizes will reduce inventory levels.Purchased lot sizes are the quantities of inventory that a stage of the supply chain either produces or purchases at a given time1.Inventory levels are the amount of stock available throughout the distribution network2.By reducing the purchased lot sizes, a company can lower the amount of inventory it holds, which can reduce the inventory costs, such as holding costs, shortage costs, and order costs3.

Holding costs are the costs associated with storing and maintaining inventory, such as rent, utilities, insurance, taxes, depreciation, and obsolescence4.Shortage costs are the costs incurred when demand exceeds supply, such as lost sales, customer dissatisfaction, and backorder costs4.Order costs are the costs involved in placing and receiving orders, such as transportation, inspection, setup, and administrative costs4.

Reducing the purchased lot sizes can lower the holding costs by decreasing the average inventory in the supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer1.This is also known as cycle inventory1.Reducing the purchased lot sizes can also lower the shortage costs by increasing the frequency of orders and decreasing the lead time between orders5. This can help avoid stockouts and meet customer demand more consistently. Reducing the purchased lot sizes can also lower the order costs by optimizing the order quantity based on the trade-off between holding costs and order costs. This is also known as economic order quantity (EOQ).

Therefore, a reduction in purchased lot sizes will reduce inventory levels and inventory costs.