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    10 Cycle Inventory1

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    abhdon
    - Cycle inventory is the average inventory held in a supply chain due to producing or purchasing items in lot sizes that are larger than customer demand. It allows companies to take advantage of economies of scale. - Lower cycle inventory leads to shorter flow times, lower working capital needs, and reduced holding costs. However, it must be high enough to realize scale economies. - Optimizing cycle inventory involves balancing costs of ordering, holding inventory, and exploiting scale economies across the entire supply chain.

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    10 Cycle Inventory1

    Uploaded by

    abhdon
    41 views18 pages
    - Cycle inventory is the average inventory held in a supply chain due to producing or purchasing items in lot sizes that are larger than customer demand. It allows companies to take advantage of economies of scale. - Lower cycle inventory leads to shorter flow times, lower working capital needs, and reduced holding costs. However, it must be high enough to realize scale economies. - Optimizing cycle inventory involves balancing costs of ordering, holding inventory, and exploiting scale economies across the entire supply chain.

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    - Cycle inventory is the average inventory held in a supply chain due to producing or purchasing items in lot sizes that are larger than customer demand. It allows companies to take advantage of economies of scale. - Lower cycle inventory leads to shorter flow times, lower working capital needs, and reduced holding costs. However, it must be high enough to realize scale economies. - Optimizing cycle inventory involves balancing costs of ordering, holding inventory, and exploiting scale economies across the entire supply chain.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views18 pages

    10 Cycle Inventory1

    Uploaded by

    abhdon
    - Cycle inventory is the average inventory held in a supply chain due to producing or purchasing items in lot sizes that are larger than customer demand. It allows companies to take advantage of economies of scale. - Lower cycle inventory leads to shorter flow times, lower working capital needs, and reduced holding costs. However, it must be high enough to realize scale economies. - Optimizing cycle inventory involves balancing costs of ordering, holding inventory, and exploiting scale economies across the entire supply chain.

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    Download as pdf or txt
    of 18

    Managing

    Economies of Scale
    in a Supply Chain:
    Cycle Inventory
    Cycle Inventory

    Lot or batch size is the quantity that a


    stage of a supply chain either produces or
    purchases at a time
    Cycle inventory is the average inventory
    in a supply chain due to either production
    or purchases in lot sizes that are larger
    than those demanded by the customer
    Q: Quantity in a lot or batch size
    D: Demand per unit time
    Inventory Profile
    Cycle Inventory

    lot size Q
    (Average)Cycle inventory = =
    2 2

    average inventory
    Average flow time =
    average flow rate

    Average flow time


    cycle inventory Q
    resulting from = =
    cycle inventory demand 2D
    Cycle Inventory

    Lower cycle inventory has


     Shorter average flow time
     Lower working capital requirements
     Lower inventory holding costs
    Cycle inventory is held to
     Take advantage of economies of scale
     Reduce costs in the supply chain
    Role of Cycle Inventory in a
    Supply Chain
    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
    In practice, each stage generally makes its
    own supply chain decisions
    Increases total cycle inventory and total
    costs in the supply chain
    Role of Cycle Inventory in a
    Supply Chain
    Economies of scale exploited in three
    typical situations
     A fixed cost is incurred each time an
    order is placed or produced
     The supplier offers price discounts based
    on the quantity purchased per lot
     The supplier offers short-term price
    discounts or holds trade promotions
    Estimating Cycle Inventory
    Related Costs in Practice
    Inventory holding cost
     Capital costs cost or opportunity cost
     Inventory space or occupancy costs
    rent or depreciation
     Inventory service costs staff,
    insurance
     Inventory risk costs - Theft, security,
    damage, deterioration, obsolescence
    Estimating Cycle Inventory
    Related Costs in Practice
    Ordering cost
     Buyer time

     Transportation costs

     Receiving costs

     Other costs
    Lot Sizing for a Single Product
    The economic order quantity (EOQ)
    * 2 DS
    Optimal lot size, Q =
    hC

    Optimal Total Cost, TC* = 2 DShC


    The optimal ordering frequency
    D DhC
    n* = =
    Q* 2S
    Optimal Time Between Orders (T*)
    Q* 2S
    Optimal T* = =
    D DhC
    Try Problems 11-1, 11-2
    Aggregating Multiple Products
    in a Single Order
    Savings in transportation costs
     Reduces fixed cost for each product
     Lot size for each product can be reduced
     Cycle inventory is reduced
    Single delivery from multiple
    suppliers or single truck delivering to
    multiple retailers
    Receiving and loading costs reduced
    Lot Sizing with Multiple
    Products or Customers
    Ordering, transportation, and receiving costs
    grow with the variety of products or pickup
    points
    Lot sizes and ordering policy that minimize
    total cost
    Di:Annual demand for product i
    S: Order cost incurred each time an order is
    placed, independent of the variety of
    products in the order
    si: Additional order cost incurred if product i
    is included in the order
    Lot Sizing with Multiple
    Products or Customers
    Three approaches
     Each product manager orders his or her
    model independently
     The product managers jointly order every
    product in each lot
     Product managers order jointly but not
    every order contains every product; that
    is, each lot contains a selected subset of
    the products
    Lots Ordered and Delivered
    Jointly
    S * = S + si
    i
    Annual order cost = nS *
    Di hCi
    Annual holding cost = 2n
    i
    Di hCi
    Total annual cost = 2n
    + nS *
    i

    Di hCi
    n* = i
    2S *
    Tailored Aggregation: Ordering
    in Coordinated (vs Common) Cycles
    Step 1: Identify the most frequently ordered
    product assuming each product is ordered
    independently
    hCi Di
    n = ni* = max ni = max
    i i 2( S + s i )

    Step 2: For all products i i*, evaluate the
    ordering frequency, using only si

    hCi Di
    ni =
    2si
    Tailored Aggregation: Ordering
    in Coordinated (vs Common) Cycles

    Step 3: For all i i*, evaluate the frequency of


    product i relative to the most frequently
    ordered product i* to be mi

    mi = n / ni where represents rounding up to the closest integer



    Step 4: Recalculate the ordering frequency of the
    most frequently ordered product i* to be n

    i =1 hCi mi Di
    l

    n=
    2 S + si / mi
    l
    i =1
    Tailored Aggregation: Ordering
    in Coordinated (vs Common) Cycles

    Step 5: Evaluate an order frequency of ni = n/mi


    and the total cost of such an ordering
    policy
    l l D
    TC = nS + ni si + i hC1
    i=1 i1 2ni

    Tailored aggregation Higher-demand products


    ordered more frequently and lower-demand
    products ordered less frequently
    Try Problem 11-10

    Breakeven Between TL and LTL

    Try Problems 11-18, 11-19

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