Question: Question 7:

Parts-Are-Us is a parts supplier launched in 2002. Annual sales have increased by a factor of 10 over the last 5 years. After reviewing inventory levels, the president of the company finds that system wide inventories have also increased by a factor of 5 over that period. The president views this as a signal that the company has been managing its inventories well.

Do you agree?

Why or why not?

Assume that the company uses an Economic Order Quantity to place orders and has no lead time or safety stock. Also assume that the setup cost and holding cost have not changed over this period – in other words, all that has changed is demand.