Final answer:
The cost of safety stock does not necessarily need to be considered in total inventory cost calculations if lead time is constant and certain. Safety stock is primarily meant to account for variability, which is not a concern if lead times are unchanging. Hence, the necessity for safety stock and its costs may be reduced, making the initial statement false.
Step-by-step explanation:
The statement is false; if lead time is constant, certain, and always the same, the cost of safety stock may not necessarily need to be included when calculating total inventory cost. Safety stock is additional inventory beyond normal demand to account for variability in lead time or demand. However, when lead time is given and unchanging, the primary reason for holding safety stock is mitigated. This implies that a business could operate with a just-in-time inventory system, reducing the need for holding safety stock, thereby minimizing associated costs.
In different costing scenarios such as (a) constant cost, (b) increasing cost, and (c) decreasing cost, the need for safety stock varies. In the context of Figure 8.8, adjustments in supply and demand can affect equilibrium price and quantity. For constant costs, equilibrium prices remain the same despite increased demand met with proportionate supply. With increasing costs, the inability to meet rising demand due to scarce inputs or rising wages results in higher equilibrium prices. Conversely, when supply can be increased easily, for instance through new technologies or economies of scale, there may be a decline in equilibrium prices.
In an environment with certain lead times, inventory management can focus more on streamlining operations and reducing costs without the burden of unexpected delays. Therefore, the assertion that safety stock costs must always be considered for total inventory cost is incorrect, especially under constant lead-time circumstances.