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August 14, 2021 at 5:50 pm #631579sonalidb
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Hi, Does just in time imply low reorder costs? If so, why?
I came across 2 different MCQ’s regarding JIT and both of them have contradicting answers
The following statements refer to different types of inventory control systems and
1 A just?in time system implies relatively low reorder costs.
2 Periodic review means ordering inventory when it falls below the designated
safety inventory level.
3 Use of the economic order quantity model means that holding and ordering
costs should be the same.
Which of the above statements is/are correct?
A 1 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
The correct answer: B (This answer is given in Kaplan the question is Green Co for ref)
With deliveries being made on a daily (or more frequent) basis, ordering costs need
to be low compared to the benefits of holding inventory. Under the EOQ model,
holding costs and ordering costs are balanced off, with the EOQ being at the point
where these are equal to each other.
Periodic review means ordering inventory at a fixed and regular time interval.
Inventory levels are reviewed at a fixed time. The inventory in hand is then made up
to a predetermined level.
Statements (1) and (3) are correct.
The other question says:
Which TWO of the following are aims of a Just in Time system of inventory control?
A Reduction in capital tied up in inventory
B Creation of an inflexible production process
C Elimination of all activities performed that do not add value
D Lowering of inventory ordering costs
The correct answer: A and C
The system aims to create a flexible production process that is responsive to the customer’s
requirements, not an inflexible process (B). With a Just in Time system, although inventory
holding costs are close to zero, inventory ordering costs are high, not low as more frequent
small deliveries of supplies will be needed (D).
I don’t understand how JIT implies to relatively lower reordering costs if it said holding cost I would have agreedAugust 14, 2021 at 5:53 pm #631580sonalidb
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The only reason that I think it IMPLIES low reordering cost is that the company needs to get some leverage by using JIT system they will want to do so only when cost of reordering < cost of holding the inventory is my explanation right?August 15, 2021 at 11:53 am #631628John MoffatKeymaster
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A just in time system will require more frequent orders. This is only going to be cost effective if the reorder cost each time is low.
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