If the unit ordering cost is high, Lot-for-Lot (L4L) may result in high total ordering cost.

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BlackTom AI · Accepted Answer

The statement to evaluate is: If the unit ordering cost is high, Lot-for-Lot (L4L) may result in high total ordering cost.

First, recall what Lot-for-Lot (L4L) means: you order exactly the quantity needed for each period, matching demand per time period, which eliminates inventory holding costs but typically increases the number of orders over a planning horizon.

Consider the impact of high unit ordering cost: when the cost to place each order is large, the total ordering cost is the product of the number of orders and the cost per order. Under L4L, you place an order in every period (or as frequently as demand occurs), which tends to maximize the number of orders. Therefore, with a high cost per order, the aggregate ordering cost will be substantial.

Now, contrast with other ordering policies: EOQ-type approaches aim to balance ordering costs and holding costs by choosing larger, less frequent orders. If the unit ordering cost is high, EOQ-type policies that reduce the number of orders can significantly lower total ordering costs, albeit at the expense of higher holding costs. Under L4L, since you forgo batching to reduce inventory, you accumulate more orders, which amplifies the effect of a high ordering cost per order.

Potential caveats to consider include the following: if demand is highly volatile or highly skewed, the practical implementation of L4L might lead to inefficiencies beyond pure ordering costs, such as safety stock considerations or supplier constraints. However, those factors do not negate the core relationship: increasing unit ordering cost magnifies the total cost impact when using L4L due to more frequent orders.

From a cost-structure perspective, the logic is straightforward: total ordering cost ≈ (number of orders) × (cost per order). Since L4L tends to maximize the number of orders, a higher cost per order pushes the total ordering cost upward more aggressively under L4L than under policies that consolidate orders. Consequently, the statement that high unit ordering cost can lead to high total ordering cost under L4L aligns with fundamental inventory management principles.

In summary, the reasoning supports the idea that when each order is expensive, the frequent ordering characteristic of L4L drives up total ordering costs, making the statement true. Potential misunderstandings to avoid include assuming that holding costs would completely offset ordering costs in L4L; while holding costs are minimized in L4L, the increased number of orders under high ordering cost conditions typically dominates, leading to higher total costs.

BUS_105_001_25S Quiz MRP_part2

If the unit ordering cost is high, Lot-for-Lot (L4L) may result in high total ordering cost.

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