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Supply Chain Management: Managing Economies of Scale in The Supply Chain: Cycle Inventory

This document discusses cycle inventory and economies of scale in supply chain management. Cycle inventory is the average inventory that builds up due to purchasing or producing goods in batches larger than customer demand. It allows companies to take advantage of lower costs from ordering in bulk. The optimal batch size, called economic order quantity, balances material, ordering, and holding costs. Cycle inventory equals half the batch size and impacts average flow time and working capital requirements.

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Samima Akteri
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878 views10 pages

Supply Chain Management: Managing Economies of Scale in The Supply Chain: Cycle Inventory

This document discusses cycle inventory and economies of scale in supply chain management. Cycle inventory is the average inventory that builds up due to purchasing or producing goods in batches larger than customer demand. It allows companies to take advantage of lower costs from ordering in bulk. The optimal batch size, called economic order quantity, balances material, ordering, and holding costs. Cycle inventory equals half the batch size and impacts average flow time and working capital requirements.

Uploaded by

Samima Akteri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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

Reduce Material Flow Time

Reduce Waiting Time

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. Lead time 3 days.
Calculate:
i) EOQ and Reorder Point
ii) Cycle inventory
iii) Number of orders per year

iv) Annual ordering cost

v) Annual holding cost


vi) Total annual cost
8
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

10

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