Question 10.RQ.2: How might each of the following affect the level of inventor...
How might each of the following affect the level of inventories held by a business?
(a) An increase in the number of production bottlenecks experienced by the business.
(b) A rise in the business’s cost of capital.
(c) A decision to offer customers a narrower range of products in the future.
(d) A switch of suppliers from an overseas business to a local business.
(e) A deterioration in the quality and reliability of bought-in components.
The level of inventories held will be affected in the following ways.
(a) An increase in production bottlenecks is likely to result in an increase in raw materials and work in progress being processed within the plant. Therefore, inventories levels should rise.
(b) A rise in the cost of capital will make holding inventories more expensive. This may, in turn, lead to a decision to reduce inventory levels.
(c) The decision to reduce the range of products should result in a lower level of inventories being held. It would no longer be necessary to hold certain items in order to meet cus-tomer demand.
(d) Switching to a local supplier may reduce the lead time between ordering an item and receiving it. This should, in turn, reduce the need to carry such high levels of the par-ticular item.
(e) A deterioration in the quality of bought-in items may result in the purchase of higher quantities of inventories in order to take account of the defective element in inventories acquired. It may also lead to an increase in the inspection time for items received. This too would lead to a rise in inventory levels.