OP MGMT ch9 - Chapter 9 Supply Chain Design The goal is to...

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Chapter 9 Supply Chain Design The goal is to reduce costs as well increase performance. Supply chains must be managed to coordinate the inputs with the outputs in a firm to achieve the appropriate competitive priorities of the firm’s enterprise processes. Inventory and Supply Chains ~Every Company Needs to Balance the Advantages and Disadvantages of Holding Inventory ~Effective supply chains attempt to support smaller more frequent orders – thus smaller inventories. Pressures for small inventories : Inventory holding cost - the sum of the cost of capital and the variable costs of keeping items on hand, such as storage and handling, taxes, insurance, and shrinkage. o Cost of capital - the opportunity cost of investing in an asset relative to the expected return on assets of similar risk, the cost of capital is usually the largest component of holding costs o Storage and handling costs o Taxes, insurance, and shrinkage Pressures for large inventories o Customer service : high inventory levels reduce the potential for stockouts and backorders. A stockout is an order that cannot be satisfied, resulting in a loss of the sale. A backorder is a customer order that cannot be filled when promised or demanded but is filled later. o Ordering cost - the cost of preparing a purchase order for a supplier or a production order for manufacturing. Each time a firm places a new order it incurs an ordering cost. o Setup cost - the cost involved in changing over a machine or workspace to produce a different item. Setup cost is also independent of order size, which created pressure to make or order a large supply of the items and hold them in inventory rather than order smaller batches. o Labor and equipment utilization : by creating more inventory, management can increase workforce productivity and facility utilization in three ways. (1) Placing larger, less frequent production orders reduces the number of unproductive setups, which add no value to a service or product. (2) Holding inventories reduces the chance of the costly rescheduling of production orders because the components needed to make the product are not in inventory. (3) Building inventories improves resource utilization by stabilizing the output rate when demand is cyclical or seasonal. o Transportation cost : Sometimes outbound transportation can be reduced by increasing inventory levels. Inbound transportation costs can also be reduced by creating more inventory. o Payments to suppliers : A firm often can reduce total payments to suppliers if it can tolerate higher inventory levels. A quantity discount , which is an incentive to order larger quantities, is a drop in the price per unity when an order is sufficiently large. Types of Inventory
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OP MGMT ch9 - Chapter 9 Supply Chain Design The goal is to...

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