1.If demand is not uniform and constant, then stockout risks can be controlled by A. increasing the EOQ. B. placing an extra order C. raising the selling price to reduce demand D. adding safety stock
Question
1.If demand is not uniform and constant, then stockout risks can be controlled by A. increasing the EOQ. B. placing an extra order C. raising the selling price to reduce demand D. adding safety stock
Solution
The correct answer is D. Adding safety stock.
Here's why:
A. Increasing the Economic Order Quantity (EOQ) may not necessarily control stockout risks if demand is not uniform and constant. EOQ is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. If demand fluctuates, a larger EOQ could lead to excess inventory during periods of low demand.
B. Placing an extra order might help in the short term, but it's not a sustainable solution. It could lead to overstocking if the demand decreases.
C. Raising the selling price to reduce demand might work in some cases, but it's not a direct method of controlling stockout risks. It's more about demand management than inventory management.
D. Adding safety stock is the most direct and effective way to control stockout risks when demand is not uniform and constant. Safety stock is a surplus of inventory that's maintained to prevent stockouts and shortages in the face of fluctuating demand. It serves as a buffer to protect against variability in demand and lead time.
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