When a firm chooses between ordering a lot at once or ordering little and often, the answer is not decided by price alone. Stated constraints such as storage space, cash and shelf life can make the cheaper option unusable. A good answer calculates the options, checks each against the constraints and states a conditional choice.
This lesson closes the content of operations and productivity. The idea of cash being tied up in stock links to cash flow and finance.
What should you compare?
Hold each option up against four questions.
- What does it cost in total? Multiply price per unit by quantity, and add delivery charges if the case gives them.
- Does it fit the space? Compare the quantity held with the storage capacity.
- Can the firm pay? Large orders need cash up front. Compare with the cash available.
- Will it spoil? Compare the time the stock lasts with its shelf life.
If an option fails any constraint, it is not a real option, whatever its price. The cash tied up in stock can also be explored with the cash versus profit bridge.
Worked example
Bakeri Manis uses 100 kg of flour a day and works 24 days a month, so it needs 24 × 100 = 2,400 kg a month. Its store room holds at most 1,000 kg. The flour keeps for 3 months.
Option A: one delivery a month of 2,400 kg at RM2.30 per kg.
Option B: one delivery a week of 600 kg at RM2.40 per kg, four deliveries a month.
Step 1, monthly cost of A. 2,400 × 2.30 = RM5,520.
Step 2, monthly cost of B. Each delivery costs 600 × 2.40 = RM1,440. Four deliveries cost 4 × 1,440 = RM5,760.
Step 3, compare. Option A is cheaper by 5,760 − 5,520 = RM240 a month.
Step 4, check constraints. Option A needs 2,400 kg of space, but the room holds 1,000 kg. It does not fit. Option B needs 600 kg, which fits. Shelf life is not a problem for either. Option A also needs RM5,520 up front, against RM1,440 for B.
Step 5, conditional conclusion. Bakeri Manis should choose Option B, because the storage room cannot hold Option A. If it could rent extra storage for less than RM240 a month, and had the cash, Option A could save money.
The mistake to watch for
A common slip is to pick the cheapest option and stop.
Mistaken answer: “Option A is better because it saves RM240 a month.”
The answer never checks whether 2,400 kg fits in a 1,000 kg room.
The correction is to test constraints before recommending. A saving that cannot be used is not a saving. The strongest answer gives the condition under which the other option would win.
Check yourself
Try these on paper, then open each answer.
1. A shop can order 500 tins at RM4.00 each in one order, or 250 tins at RM4.20 each in two orders. Its storage holds 300 tins. Compare the cost of 500 tins both ways and say which option the shop can use.
Show answer
One large order: 500 × 4.00 = RM2,000. Two smaller orders: 2 × (250 × 4.20) = 2 × 1,050 = RM2,100. The large order is RM100 cheaper, but it needs space for 500 tins and the store holds 300. The shop can only use the two smaller orders.
2. A stall sells fresh fish that stays fresh for 2 days. It is offered a discount for ordering a week’s supply at once. Which constraint rules this out?
Show answer
Shelf life. A week’s supply would spoil long before it is sold, so the discount is of no use.
3. A bulk order costs RM3,600, paid up front. The firm has RM2,500 in cash, and a weekly order costs RM900. Which can the firm afford this month?
Show answer
The bulk order costs RM3,600, which is more than RM2,500, so the firm cannot afford it. The weekly order of RM900 is within its cash.
Where this leads next
You have now covered the lessons in the module. Try the operations practice set to mix all five skills together. If you want to see where operations choices show up in costs, costs, revenue and break-even is the natural next module.
Some students calculate both options correctly but forget to test the limits in the case. A teacher in online one-to-one Business tuition can help make that check automatic.