Question

As demand for a given product increases nine fold from one year to the next, all else equal, cycle stocks for this particular product should grow by a factor of...?

a) 1
b) 2
c) 3
d) 4

Answer 1

When demand for a product increases nine-fold, cycle stocks for the product should increase by a factor of c) 3, due to the relationship between demand and cycle stock being proportional to the square root of the demand ratio.

Step-by-step explanation:

When demand for a given product increases nine-fold, assuming all other factors remain constant, cycle stocks for this product should logically increase to meet the new level of demand. Cycle stock is directly related to the amount of product that is needed to satisfy customer demand between replenishments. Therefore, if the demand increases nine-fold, the cycle stock does not have to increase by the same amount because of efficiencies and economies of scale. However, assuming a direct relationship for this scenario, the cycle stock will increase by a factor of three 3 (c), which is the square root of the increase in demand because the relationship between demand and cycle stock is typically proportional to the square root of the demand ratio when all else is equal.