Discussion Ch 10 Chopra & Meindl

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CHAPTER TEN Discussion Questions

1. Consider a supermarket deciding on the size of its replenishment order from Proctor & Gamble. What costs should it take into account when making this decision?

The main cost categories for the supermarket’s inventory policy are material costs, ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for the goods themselves. Ordering costs, also called procurement costs, are incurred by requesting the goods from the supplier and are fixed in the sense that they do not vary with the size of the order. Examples of such fixed costs are the labor required to place the order, handle the resultant paperwork and the transportation fee to ship the order.
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6. What is the difference between lot size-based and volume-based quantity discounts?

Lot size discounts are based on the quantity purchased per lot, not the rate of purchase. Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging retailers to increase the size of each lot. Lot size-based discounts make sense only when the manufacturer incurs a very high fixed cost per order. For commodity products for which price is set by the market, manufacturers with large fixed costs per lot can use lot size-based quantity discounts to maximize total supply chain profits.

Volume discounts are based on the rate of purchase or volume purchased per specified time period. Volume-based discounts are compatible with small lots that reduce the cycle inventory. If the manufacturer does not incur a very high fixed cost per order, it is better for the supply chain to have volume-based discounts. For products for which a firm has market power, volume-based discounts can be used to achieve coordination in the supply chain and maximize supply chain profits.

7. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What impact do trade promotions have on the supply chain? How should trade promotions be structured to maximize their impact while minimizing the additional cost they impose on

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