Management Notes

Reference Notes for Management

If demand is not uniform and constant, the stockout risks can be controlled by

If demand is not uniform and constant, the stock-out risks can be controlled by


A. increasing the EOQ.
B. spreading annual demand over more frequent, but smaller, orders.
C. raising the selling price to reduce demand.
D. adding safety stock.
E. reducing the reorder point.

The Correct Answer Is:

D. adding safety stock.

Correct Answer Explanation: D. adding safety stock.

Adding safety stock is the correct option for controlling stock-out risks when demand is not uniform and constant. Safety stock is extra inventory held to buffer against variability in demand or lead time. It acts as a cushion to account for unexpected fluctuations in demand or delays in the replenishment process.

When demand is not uniform and constant, it means that there are periods of higher and lower demand, which can lead to stock-outs if inventory levels are not managed effectively.

By adding safety stock, a company can ensure that even during periods of high demand or unexpected delays in the supply chain, there is enough inventory on hand to meet customer needs. This helps in preventing stock-outs and maintaining customer satisfaction.

Now let’s discuss why the other options are not correct:

A. Increasing the EOQ (Economic Order Quantity):

The EOQ is a formula used to calculate the optimal order quantity that minimizes total inventory costs, including holding costs and ordering costs. While it is a valuable tool for optimizing the quantity of each order, it does not directly address the issue of fluctuating demand.

The EOQ assumes a constant demand rate, which means it may not be well-suited for scenarios where demand levels vary over time. Increasing the EOQ might lead to higher holding costs, as more inventory would need to be stored, without necessarily solving the problem of stockouts during periods of high demand.

B. Spreading annual demand over more frequent, but smaller, orders:

This approach, often referred to as “smoothing” or “leveling,” is aimed at distributing the ordering of inventory more evenly over time.

While it can help in aligning ordering with demand patterns, it may not fully address the risks associated with variable demand. Smaller, more frequent orders can reduce the impact of large, infrequent orders on inventory levels, but they may still not be sufficient to handle sudden spikes in demand.

Additionally, this approach needs to be balanced with considerations of ordering costs, which can increase with more frequent orders.

C. Raising the selling price to reduce demand:

This strategy focuses on influencing customer behavior by increasing the price of the product. While it may indeed lead to a reduction in demand, it does not directly tackle the issue of stockouts due to variable demand.

Additionally, increasing prices may not always be a viable or competitive option, especially in markets with price-sensitive consumers or in highly competitive industries.

E. Reducing the reorder point:

The reorder point is the level of inventory at which a new order is triggered. Lowering the reorder point might result in more frequent reorders, but it may also lead to underestimating the inventory needed during periods of high demand.

This can exacerbate stock-out risks, as orders may not be placed in time to meet customer demand. Adjusting the reorder point is more focused on managing lead times and ordering frequencies, rather than addressing variability in demand itself.

In conclusion, while options A, B, C, and E have their merits in specific inventory management contexts, they do not directly address the issue of stock-out risks stemming from non-uniform and variable demand.

Adding safety stock remains the most effective strategy in such scenarios, providing a cushion against unexpected fluctuations in demand or lead time, and ensuring consistent customer satisfaction.

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