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820 Aufrufe16 SeitenMar 12, 2011

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with Cycle Inventory

Inventories in a Supply Chain

Supply Chain

o Cycle inventory exists because

producing or purchasing in large lots

allows a stage of the supply chain to

exploit economies of scale.

o The economies of scale are typically

associated with:

n Fixed ordering and transportation costs

n Quantity discounts in product pricing

n Short-term discounts or trade promotions.

Cycle Inventory 2

1

Managing Cycle Inventories

o Each of these factors impact upon the

lot size and cycle inventory in

particular ways.

o There are several managerial levers

that can be employed to reduce cycle

inventory in a supply chain without

raising costs.

Cycle Inventory 3

o Cycle inventory is the average inventory in

the supply chain due to either production or

purchases in lot sizes that are larger than

those demanded by the customer. We may

thus use the following notation

n Q = Quantity in a lot or batch

n D = Demand per unit time

o We ignore the impact of demand variability

because it has marginal impact on lot size

and cycle inventory.

Cycle Inventory 4

2

Cycle Inventory Illustrated

o Consider the sale of jeans at a

department store. Demand for jeans

is considered to be fairly stable at

D=100 jeans per day.

n If the store manager purchases in lots of

Q = 1,000 jeans, an inventory profile of

the jeans at the store can be drawn.

n This develops as a cyclical pattern

repeating over time. It can be easily

represented by a graph.

Cycle Inventory 5

Cycle Inventory

Interrelationships

o Lot sizes and cycle inventory also

influence the flow time of material

within the supply chain:

n Avg. flow time = Avg. inventory / Avg. flow

rate

o For any supply chain, average flow

rate equals the demand. Therefore,

n Avg. flow time = Avg. inventory / Demand

n Avg. flow time = Q/2D

Cycle Inventory 6

3

Cycle Inventory Adds to the Flow

Time

o The larger the cycle inventory, the longer

the lag time between when a product is

produced and when it is sold.

o All else being equal, a lower level of cycle

inventory is always desirable because large

time lags leave a firm vulnerable to

demand changes in the marketplace.

o A lower cycle inventory is also desirable

because it decreases the working capital

requirement for a firm.

Cycle Inventory 7

to Lot Sizes

o To understand how the supply chain

achieves economies of scale by increasing

the lot size, we must first identify supply

chain costs that are influenced by the lot

size. These are:

n Average price paid per unit purchased ‘C’

($/unit)

n Fixed ordering cost ‘S’ ($/lot)

n Holding cost ‘H’ ($/unit/year), or h*C, where h

is a %age or fraction of holding $1 in inventory

for one year.

Cycle Inventory 8

4

Lot-Size Costs Inter-relationships

Set up Cost Holding Cost Total Cost

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

25 50 75 100 125 150 175 200 225 250

Cycle Inventory 9

o A firm may be better served by ordering a

convenient lot size close to the EOQ rather

than the precise EOQ.

o If demand increases by a factor k, the EOQ

increases by a factor of k1/2. The number of

orders placed per year should also increase

by a factor k1/2. Flow time should decrease

by k1/2.

o To reduce the EOQ by a factor k, the fixed

order cost S must be reduced by k2.

Cycle Inventory 10

5

Reducing Lot Sizes Without

Increasing Costs

o A key to reducing cycle inventory is the

reduction of lot size.

o A key to reducing lot size without

increasing costs is to reduce the fixed cost

associated with each lot.

o An alternate way of reducing the lot size

and (or) fixed cost is by aggregating lots

across multiple products, customers, or

suppliers.

n When aggregating lots, tailored aggregation is

best, especially if product specific order costs

are large.

Cycle Inventory 11

o Demand for the Desktop 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. Each computer costs Best Buy

$500 and carries a holding cost of 20%.

n The optimal lot size in this case will be 980

units, a cycle inventory of 480, and a total

annual inventory cost of $97,980.

n If the lot size were to be reduced to 200, then

the corresponding fixed cost will have to be

$166.7.

Cycle Inventory 12

6

Aggregating Multiple Products

in a Single Order

o To effectively reduce the lot size, the

materials manger needs to

understand the source of the fixed

cost.

o In several companies the array of

products sold is divided into families

or groups with each group managed

independently by a separate product

manager.

Cycle Inventory 13

o Best Buy also purchases the Litepro,

Medpro, and Heavypro Models apart from

the Deskpro.

o Currently, a separate product manager is

responsible for the inventory and sales of

each model. As a result, the ordering and

delivery for each model is independent.

n The fixed transportation cost of $4,000 is thus

incurred separately for each model.

n This leads to each product manager ordering a

large lot size for their product.

Cycle Inventory 14

7

Optimal Lot Sizes for Independent

Demand versus Aggregated Demand

the four models is 1,000 units per

month. In this case, if each product

manager orders separately, he would

order a lot size of 980 units.

o Across the four models, the total

cycle inventory would thus be 1960

units.

Cycle Inventory 15

Demand versus Aggregated Demand

shipments originate from the same source,

then the managers may be asked to ensure

that all four products arrive on the same truck.

o In this case, the optimal combined lot size

across all four models turns out to be 1,960

units. This is equivalent to 480 units for each

model. This action significantly reduces the

cycle inventory (980 units) as well as cost to

Best Buy.

Cycle Inventory 16

8

An Alternate Situation

o Another way to achieve the previous

result is to have a single delivery

coming up from multiple suppliers.

n Allows fixed transportation cost to be

spread across multiple suppliers.

o Or have a single truck delivering to

multiple retailers.

n Allows fixed transportation cost to be

spread across multiple retailers.

Cycle Inventory 17

o When considering fixed costs, one cannot

ignore the receiving or loading costs. As more

products are included in a single order, the

product variety on a truck (shipment)

increases.

o The receiving warehouse now has to update

inventory records for more items per truck. In

addition, the task of putting inventory into

storage now becomes more expensive because

each distinct item must be stocked in a

separate location.

Cycle Inventory 18

9

Advanced Shipping Notices

(ASN)

o When attempting to reduce lot sizes, it is

important to focus on reducing the handling

costs. Advanced Shipping Notices (ASN) are

files sent electronically by the supplier to the

customer that contain precise records of the

contents of the truck.

o These electronic notices facilitate updating of

inventory records as well as the decision

regarding storage locations, helping to reduce

the fixed cost of receiving. The reduced fixed

cost of receiving makes it optimal to reduce

the lot size ordered, thus reducing cycle

inventory.

Cycle Inventory 19

Products or Customers

o Our objective is to arrive at lot sizes

and an ordering policy that minimizes

the total cost. We assume the

following input:

n Di = Annual demand for product i

n S = Order cost incurred each time an

order is placed independently of the

variety of products included in the order

n si = Additional order cost incurred if

product i is included in the order

Cycle Inventory 20

10

Multiple Order Policy for Best Buy

o In the case of Best Buy Computers with

multiple products, the materials manager

may consider three approaches to the lot

sizing decision:

1. Each product manager orders his model

independently.

2. The product managers jointly order every

product in each lot.

3. Product managers order jointly but not every

order contains every product; that is, each lot

contains a selected subset of the products.

This is also called ‘tailored aggregation.’

Cycle Inventory 21

Approach

o The first approach does not use any

aggregation and will result in the highest cost.

o The weakness with the second approach is that

low-volume products are aggregated with high-

volume products in every order, which results

in the product-specific order cost for the low-

volume product being incurred with each order.

n In such a situation it may be better to order the

low-volume products less frequently than the

high-volume products.

n As a result, the third approach is likely to yield

the lowest cost.

Cycle Inventory 22

11

The ‘Selected Subset’ Approach

1. Identify the most frequently ordered

product, assuming each product is ordered

independently.

2. Identify the frequency with which other

products are included with the most

frequently-ordered product.

3. Having decided the ordering frequency of

each product, recalculate the ordering

frequency of the most-frequently ordered

product.

4. For each product, evaluate an order

frequency of ni = n/mi.

Cycle Inventory 23

Quantity Discounts

o There are many instances where the

pricing schedule yields economies of scale,

with prices decreasing as lot size is

increased. This form of pricing is very

common in B2B transactions.

o Two commonly used lot-size based

discount schemes are:

o All unit quantity discounts

o Marginal unit quantity discount or multi-block

tariffs.

Cycle Inventory 24

12

Economies of Scale to Exploit

Quantity Discounts cont.

o In assessing the impact of quantity

discounts on the supply chain, the following

two questions should be answered.

n Given a pricing schedule with quantity discounts,

what is the optimal purchasing decision for a

buyer seeking to maximize profits? How does

this decision impact the supply chain in terms of

lot sizes, cycle inventories, and flow times.

n Under what conditions should a supplier offer

quantity discounts? What are appropriate pricing

schedules that supplier should offer?

Cycle Inventory 25

o In all unit quantity discounts, the pricing

schedule contains specified break points q0,

q1,.....,qr where q0= 0. If an order is placed

that is at least as large as qi but smaller

than qi+1, then each unit is obtained at a

cost of Ci.

o In general, the unit cost decreases as the

quantity ordered increases; that is, C0≥

C1≥ Cr.

n The company’s objective is to decide on lot sizes

to maximize profits or equivalently, to minimize

the sum of material, order, and holding costs.

Cycle Inventory 26

13

Optimal Lot-Sizing Approach

o The solution procedure evaluates the

optimal lot size for each price Ci and

then settles on the lot size that

minimizes the overall cost.

o There are three possible cases for Qi:

1. qi ≤ Qi.≤ qi+1

2. Qi < qi

3. Qi > qi+1

Cycle Inventory 27

o In this case, the pricing schedule contains

specified break points q0, q1,.....,qr where

q0= 0. It is not the average cost of a unit

but the marginal cost of a unit that

decreases at a break point. If an order of

size q is placed, the first q1 - q0 units are

priced at C0, the next q2 - q1 at C1, and so

on.

o The marginal cost per unit varies with the

quantity purchased.

n The company’s objective is to decide on lot sizes

to maximize profits or equivalently, to minimize

the sum of material, order, and holding costs.

Cycle Inventory 28

14

Optimal Lot-Sizing Approach

o For each ‘i’ the optimal lot size and

the corresponding costs are

evaluated. The solution is to set the

lot size to be the one that minimizes

total annual cost across all ranges i.

n It can be shown that the overall optimal

lot size will always lie within the range

qi ≤ Qi.≤ qi+1. Hence, the case where

Qi < qi or Qi > qi+1 will not be evaluated

any further.

Cycle Inventory 29

in the Supply Chain

o A supply chain is coordinated if the

decisions the retailer and supplier make

maximize total supply chain profits.

o In reality, each stage has a separate owner

and considers its own costs in an effort to

maximize its own profits. Such independent

actions can result in a lack of coordination

in the supply chain.

o With respect to the quantity discounts, two

particular situations can be considered:

1. Quantity discounts for commodity products.

2. Quantity discounts where the firm has market

power.

Cycle Inventory 30

15

A Commodity Product Example

Vitamin Product Retailer Manufacturer

Fixed Order Cost $100 $250

Unit price/cost $3 $2

If the manufacturer were to price vitamins so that each

bottle cost $3 for all orders with lot sizes under 9,165 and

$2.9978 for all orders above 9,165, the retailer will have an

incentive to order in lots of 9,165.

Cycle Inventory 31

A Key Point

o For commodity products where price

is set by the market, manufacturers

can use lot size based quantity

discounts to achieve coordination in

the supply chain and decrease supply

chain costs.

n Lot size based discounts, however,

increase cycle inventory in the supply

chain.

Cycle Inventory 32

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