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The larger each order quantity, the fewer the number of orders placed in a year and hence, the lower the annual ordering cost. However large order quantities lead to higher levels of inventory and therefore higher annual inventory holding costs. Unfortunately, the ordering cost is incurred by the purchase department and the inventory holding cost by the operations department. The director of purchasing is reducing his department??s cost (by having a large order quantity) while increasing the operation department??s cost. (Stevenson, 2007)
Both departments should be working towards minimizing the total cost to the company...
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