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    Chapter 11 (SCM)

    Uploaded by

    Md. Wahid Abdul Hoque
    This document discusses cycle inventory and economies of scale in supply chain management. It defines cycle inventory as the average inventory that builds up due to purchasing in lot sizes larger than customer demand. Lower cycle inventory is preferable to reduce costs. The economic order quantity formula is provided to determine optimal lot size that minimizes total costs of ordering, holding, and material costs. Examples are given to calculate costs and lot sizes under different scenarios.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Chapter 11 (SCM)

    Uploaded by

    Md. Wahid Abdul Hoque
    50 views12 pages
    This document discusses cycle inventory and economies of scale in supply chain management. It defines cycle inventory as the average inventory that builds up due to purchasing in lot sizes larger than customer demand. Lower cycle inventory is preferable to reduce costs. The economic order quantity formula is provided to determine optimal lot size that minimizes total costs of ordering, holding, and material costs. Examples are given to calculate costs and lot sizes under different scenarios.

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    This document discusses cycle inventory and economies of scale in supply chain management. It defines cycle inventory as the average inventory that builds up due to purchasing in lot sizes larger than customer demand. Lower cycle inventory is preferable to reduce costs. The economic order quantity formula is provided to determine optimal lot size that minimizes total costs of ordering, holding, and material costs. Examples are given to calculate costs and lot sizes under different scenarios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    50 views12 pages

    Chapter 11 (SCM)

    Uploaded by

    Md. Wahid Abdul Hoque
    This document discusses cycle inventory and economies of scale in supply chain management. It defines cycle inventory as the average inventory that builds up due to purchasing in lot sizes larger than customer demand. Lower cycle inventory is preferable to reduce costs. The economic order quantity formula is provided to determine optimal lot size that minimizes total costs of ordering, holding, and material costs. Examples are given to calculate costs and lot sizes under different scenarios.

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    © All Rights Reserved
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    You are on page 1of 12

    Supply Chain Management

    Chapter 11
    Managing Economies of Scale in
    the Supply Chain: Cycle Inventory

    10-1
    Role of Inventory in the Supply Chain

    Improve Matching of Supply


    and Demand
    Improved Forecasting
    Cost Availability
    Reduce Material Flow Time

    Efficiency Reduce Waiting Time Responsiveness

    Reduce Buffer Inventory

    Supply / Demand Seasonal


    Economies of Scale Variability Variability

    Cycle Inventory Safety Inventory Seasonal Inventory


    10-2 Figure Error! No text of
    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 year
     Cycle inventory = Q/2
     Average flow time from cycle inventory =
    10-3
    Q/(2D)
    Role of Cycle Inventory in a Supply
    Chain

     Lower cycle inventory is better


    because:
    ⚫ Average flow time is lower
    ⚫ Working capital requirements are
    lower
    ⚫ Lower inventory holding cost

     Cycle inventory is held primarily to


    take advantage of economies of
    scale in the supply chain
    10-4
    Role of Cycle Inventory in a Supply
    Chain
     Supply chain costs influenced by lot size:
    ⚫ Per Unit 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
    10-5 chain
    Economies of Scale to Exploit Fixed
    Costs
    Annual demand = D
    Number of orders per year = D/Q
    Annual material cost = CD
    Annual order cost = (D/Q)S
    Annual holding cost = (Q/2)H = (Q/2)hC
    Total annual cost = TC = CD + (D/Q)S +
    (Q/2)hC
    Economic Order Quantity (EOQ)=
    √2DS/hC
    10-6 Reorder Point (R)=d L
    Estimating Cycle Inventory-
    Related Costs in Practice
     Inventory holding cost
    ⚫ Cost of capital
    ⚫ Obsolescence cost
    ⚫ Handling cost
    ⚫ Occupancy cost
    ⚫ Miscellaneous costs
     Ordering cost
    ⚫ Buyer time
    ⚫ Transportation costs
    ⚫ Receiving costs
    10-7 ⚫ Other costs
    Example 1
     Demand for the Deskpro computer at Best Buy is
    1,000 units per month. Best Buy incurs a fixed
    order placement, transportation, and receiving
    cost of $4,000 each time an order is placed. Each
    computer costs Best Buy $500 and the retailer has
    a holding cost of 20 percent. Calculate:
    i) EOQ
    ii) Cycle inventory
    iii) Number of orders per year

    iv) Annual ordering cost

    v) Annual holding cost


    vi) Total annual cost

    vii) Average flow time


    8
    Example-2

     The store manager at Best Buy


    would like to reduce the optimal lot
    size from 980 to 200. For this lot
    size reduction to be optimal, the
    store manager wants to evaluate
    how much the ordering cost per lot
    should be reduced.

    9
    Example-3
    QUANTITY DISCOUNTS
     Drugs Online (DO) is an online retailer of
    prescription drugs and health supplements.
    Vitamins represent a significant percentage of its
    sales. Demand for vitamins is 10,000 bottles per
    month. DO incurs a fixed order placement,
    transportation, and receiving cost of $100 each
    time an order for vitamins is placed with the
    manufacturer. DO incurs a holding cost of 20
    percent.
     The price charged by the manufacturer follows the
    all unit discount pricing schedule is shown
    following.
    Continue

    Order Quantity Unit Price

    0-5000 3.00

    5000-10000 2.96

    10000-more 2.92

    12

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