Week 7 discussion board - &Logisticsinthe Collection...

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2/21/2016 Collection – MBA675­T303 Operations & Logistics in the (... ; 1/26 Collection Users can Collect posts into a printable, sortable format. Collections are a good way to organize posts for quick reading. A Collection must be created to tag posts. More Help Thread: McLendon Q16 Post: McLendon Q16 Author: Posted Date: January 25, 2016 8:45 PM Status: Published 16. What are the purposes of safety stock? How will the use of safety stock affect the total annual inventory cost? Illustrate these concepts with an example. According to Krajewski, Malhotra, and Ritzman (2015, p. 323), safety stock inventory is surplus inventory a company holds to protect again shortages due to fluctuating demands or lead times. The purpose of safety stock is to reduce the risk that a product runs out of stock. A safety stock may need to be kept for varying reasons. One reason is to mitigate customer dissatisfaction. If a customer expects to receive the product immediately, he will not be pleased if there is a long wait. This could result in lost sales, both short and long­term. For example, a customer seeking an iPhone will not be satisfied to wait for three weeks for the model he wants at his regular wireless carrier if he can go to other carriers and get the device immediately. Another reason safety stock may be kept is to mitigate for varying demand of a product. If a product’s demand is more than the forecast, a safety stock will help offset the low forecast, however, a demand that is too high can mean higher carrying costs and excess product. For example, home improvement stores in the South may choose to increase their inventory of generators as hurricane season approaches. Generators can be carried from year to year without major loss, but in the case a hurricane hits an area, the store will sell out of as many generators as they have in stock. A company’s ability to change products nimbly when market landscapes change is also reduced if it is carrying safety stock. This is evident in the electronics industry. If someone carries too much inventory of a television, it may not be able to purchase the next great television upon its release. If safety stock Jana McLendon
2/21/2016 Collection – MBA675­T303 Operations & Logistics in the (... ; 2/26 (Post is Read) dominates its inventory, it may not have the purchase power to compete. When a company carries safety stock, it increases its total cost of inventory. The costs of the inventory will be increased by additional produced or stored items, storage and handling costs, and additional taxes, insurance, and shrinkage.

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