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.Managing Economies of Scale in the Supply Chain: Cycle InventorySupply Chain Analytics
Dr. Srikanta Routroy.2OutlineRole of Cycle Inventory in a Supply Chain.Economies of Scale to Exploit Fixed Costs.Economies of Scale to Exploit Quantity Discounts.Short-Term Discounting: Trade Promotions.Managing Multi-Echelon Cycle Inventory.Estimating Cycle Inventory-Related Costs in Practice.
Dr. Srikanta Routroy.3Role of Cycle Inventoryin a Supply ChainLot, or batch size: quantity that a supply chain stage either produces or orders at a given time.Cycle inventory: average inventory that builds up in the supply chain because a supply chain stage either produces or purchases in lots that are larger than those demanded by the customer–Q = lot or batch size of an order–d = demand per unit timeInventory profile: plot of the inventory level over time. Cycle inventory = Q/2 (depends directly on lot size)Average flow time = Avg inventory / Avg flow rateAverage flow time from cycle inventory = Q/(2d)
Dr. Srikanta Routroy.5Role of Cycle Inventoryin a Supply ChainCycle inventory is held primarily to take advantage of economies of scale in the supply chain.Supply chain costs influenced by lot size:–Material cost = C–Fixed ordering cost = S–Holding cost = H = hC (h = cost of holding $1 in inventory for one year)Primary role of cycle inventory is to allow different stages to purchase product in lot sizes that minimize the sum of material, ordering, and holding costs.Ideally, cycle inventory decisions should consider costs across the entire supply chain, but in practice, each stage generally makes its own supply chain decisions – increases total cycle inventory and total costs in the supply chain.
Dr. Srikanta Routroy.7Fixed Costs: Optimal Lot Sizeand Reorder Interval (EOQ)D: Annual demand S:Setup or Order CostC:Cost per unith:Holding cost per year as a fraction of product costH: Holding cost per unit per yearQ: Lot SizeT:Reorder intervalMaterial cost is constant and therefore is not considered in this modelDHSnHDSQhCH2*2*