Nov 8, 2017 in Economics

Cost Control Techniques

The customers usually have different tastes and preferences and this makes them demand different goods from one another. There are various ways in which firms cope with huge variability in customer demands. First, the firms may decide to hold their products for some time. This helps the company avert from the variability in the customer demand. The customer may demand a certain type of product at one point and in future prefer another product. Secondly, the firms may decide to differentiate their products so that they remain relevant. The customers are in a position to get what they want and the risk of making loss in the company is minimized.

Relationship between Service and Inventory Levels

The service has a direct relationship with the inventory level in a firm. The service level means that the customers are served in the best capacity. This ensures that the sales of the firm are increased and the inventory levels eventually go down. The service also ensures that there are more warehouses hence the products of the firms are brought closer to the people. This reduces the average travel time and makes it possible for people to access the firm’s products quickly. The inventory levels are therefore reduced significantly.

Impacts of Lead Time and Lead Time Variability

The lead time is the time that is required to place an order. The lead time affects the inventory levels significantly. When the lead time is more, it means that the inventory level is high. The customers may take a long time to place an order. This makes the inventory level to remain at a high level. The lead time variability also affects the inventory level. It is not possible to determine the optimal levels of inventory with certainty. This may lead to losses when high levels of inventory have to be maintained. This is because the more the inventories, the higher the cost of maintaining them.

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