lecture8_SupplyChain_CycleInventory

lecture8_SupplyChain_CycleInventory - ESI 6323 Managing...

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ESI 6323 Managing Economies of Scale in the Supply Chain: Cycle Inventory
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1 Outline Role 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
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2 Role of Inventory in the Supply Chain Improve Matching of Supply and Demand Improved Forecasting Reduce Material Flow Time Reduce Waiting Time Reduce Buffer Inventory Economies of Scale Supply / Demand Variability Seasonal Variability Cycle Inventory Safety Inventory Seasonal Inventory
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3 Role of Cycle Inventory in a Supply Chain Lot, 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 time Inventory profile: plot of the inventory level over time (Fig. 10.1) Cycle inventory = Q/2 (depends directly on lot size) Average flow time = Avg inventory / Avg flow rate Average flow time from cycle inventory = Q/(2D)
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4 Role of Cycle Inventory in a Supply Chain Q = 1000 units D = 100 units/day Cycle inventory = Q/2 = 1000/2 = 500 = Avg inventory level from cycle inventory Avg flow time = Q/2D = 1000/(2)(100) = 5 days Cycle inventory adds 5 days to the time a unit spends in the supply chain Lower cycle inventory is better because: Average flow time is lower Working capital requirements are lower Lower inventory holding costs
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5 Role of Cycle Inventory in a Supply Chain Cycle 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
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6 Economies of Scale to Exploit Fixed Costs How do you decide whether to go shopping at a convenience store or at Sam’s Club? Lot sizing for a single product (EOQ) Aggregating multiple products in a single order Lot sizing with multiple products or customers Lots are ordered and delivered independently for each product Lots are ordered and delivered jointly for all products Lots are ordered and delivered jointly for a subset of products
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Economies of Scale to Exploit Fixed Costs Annual demand = D Number of orders per year = D/Q Annual material cost = CR Annual order cost = (D/Q)S Annual holding cost = (Q/2)H = (Q/2)hC
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This note was uploaded on 03/02/2012 for the course ESI 6323 taught by Professor Guan during the Spring '09 term at University of Florida.

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lecture8_SupplyChain_CycleInventory - ESI 6323 Managing...

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