Demand for a Component Averages 80 Units Per Week, with a Weekly

question 25

Essay

Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14 units.The current supplier of this component offers a four-week lead time.Stockout risk is to be kept at 8%.Assume that it costs $50 to hold one unit in inventory for a year.Suppose the annual cost for the items would be $500 higher if they were purchased from another vendor, but that vendor would offer a two-week lead time.Would it be better to go with the more-expensive but more-responsive vendor?

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Definitions:

Market Efficiency

A condition in financial markets where prices fully reflect all available information, leading to assets being priced accurately and trades being executed fairly.

Financial Reporting

The process of producing statements that disclose an organization's financial status to management, investors, and the government.

Semi-Strong Form

The semi-strong form is a level of market efficiency theory suggesting that asset prices reflect all publicly available information.

Mechanistic Hypothesis

The hypothesis that share prices respond mechanistically to changes in accounting numbers, ignoring the effects of accounting policies.