inventory that exists because producing or purchasing in large lots allows a stage of the supply chain to exploit economies of scale and thus lower costs
the quantity that a stage of a supply chain either produces or purchases at a time
lot or batch size
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
What is the average flow time formula?
average inventory / average flow rate
What causes cycle inventory?
average flow time
formula for cycle inventory
lot size / 2
The cost of carrying one unit in inventory for a specified period of time, usually one year, is referred to as
Holding Cost (H)
What is the holding cost formula?
Why have cycle inventory?
to take advantage of economies of scale and reduce cost within a supply chain
5 parts of inventory holding costs
cost of capital, obsolescence cost, handling cost, occupancy cost, miscellaneous costs
4 components of ordering cost
buyer time, transportation cost, receiving cost, other
estimates the rate at which the value of the stored product drops because its market value or quality fails
includes only incremental receiving and storage costs that vary with the quantity of product received
the incremental change in space cost due to changing cycle inventory
the incremental time of the buyer placing an extra order
type of cost that is often incurred regardless of the size of the order
transportation cost and receiving costs
study graph page 303
Formula: average flow time resulting from cycle inventory
cycle inventory / demand
all costs that doe not vary with the size of the order but are incurred each time an order is placed
fixed ordering cost
What is the economic order quantity formula?
SQRT ((2 x D x S) / (H x C))
3 costs to consider when making a lot-size decision?
annual ordering cost, material cost, holding cost
3 costs considered in the EOQ
material, ordering, inventory
If demand increases by a factor of k, the optimal lot size increases by what?
a factor of .
to reduce the optimal lot size by a factor of k, the fixed order cost S must be reduced by what?
a factor of k^2
Graph on 308
K = what
minimum order quantity
If EOQ > K then
If EOQ < K then
What is the optimal aggregation of product ordering?
order multiple products and have them delivered jointly for a selected set of products that varies by order
3 approaches to lot sizing with multiple products
1) order all independently and deliver independently
2) multiple products ordered and delivered jointly
3) multiple products ordered and delivered jointly for a selected set of products that varies by order
What type of discount varies if the quantity ordered at a time varies?
lot-size based discount
What type of discount varies if the total quantity purchased over a given period varies?
type of discount: pricing schedule contain specified break points; whichever breakpoint contains the number for your total order is the pricing per unit
all unit quantity discounts
Type of discount: pricing schedule contains specified break points; units are priced in each breakpoint (first 100 are this, 100-200 are this etc.)
marginal unit quantity discounts
2 reasons suppliers offer quantity discounts
improved coordination to increase profits; extraction of surplus by supplier through price discrimination
Why do suppliers offer quantity discounts?
Supplier convince customers to buy larger groups
the practice in which a firm charges different prices to maximize profits
key distinction between lot-size-based and volume discounts
lot-size discounts are based on the quantity purchased per lot, not the rate of purchase
offers a discounted price to retailers and set a time period over which the discount is effective
occurs when a retailer purchases in the promotional period for sales in future periods
trade promotions lead to what ?
increase in lot size and cycle inventory because of forward buying by the retailer
a supply chain with multiple stages and possibly many players at each stage
multiechelon supply chain
fixed order quantity
period order quantity
quantity based on past practices; we always order 2,000
FOQ - fixed order quantity
Quantity based upon ordering a fixed time period supply; "We always order 3 weeks worth
economic production quantity
inventory carried to satisfy demand that exceeds the amount forecasted
average inventory remaining when replenishment arrives
2 factors that affect the level of safety inventory
uncertainty of demand/supply and desired level of product availability
gap between the time an order is placed and when it is received
Formula for demand during lead time
demand x lead time
ratio of the standard deviation to the mean
coefficient of variation
results if a customer order arrives when a product is not available
the fraction of the product demand that is satisfied from product in inventory
product fill rate
the fraction of orders that are filled from available inventory
order fill rate
the interval between two successive replenishment deliveries
The fraction of replenishment cycles that end with all the customer demand being met
cycle service level
fraction of order lines completely filled from available inventory
line fill rate
inventory is continuously tracked and an order for a lot size Q is placed when the inventory declines to the reorder point
inventory status is checked at regular periodic intervals and an order is placed to raise the inventory level to a specified threshold
formula for safety inventory
ss = ROP - D X L (safety stock = reorder point - demand x lead time)
average units of demand that are not satisfied from inventory in stock per replenishment cycle
expected shortage per replenishment cycle
What is the affect of an increase in desired product availability on safety inventory?
required safety inventory grows rapidly
3 ways to reduce the level of safety inventory
reduce supplier lead time, reduce the underlying uncertainty of demand, reduce uncertainty of supplier lead time
What is the goal for correlation?
minimal positive correlation
2 disadvantage to aggregation
increase in response time to customer order; increase in transportation cost to customer
delay product differentiation or customization until closer to the time the product is sold
Which replenishment policy requires more safety inventory?
Inventory between a stage and the final customer is called what?
What measures product availability?
cycle service level or the fill rate
another name for product availability
customer service level
What is the optimal level of product availability?
one the maximizes supply chain profits
loss incurred by a firm for each unsold unit at the end of the selling season
margin lost by a firm for each lost sale because there is no inventory on hand
2 managerial levers to increase profitability
increase salvage value and decrease the margin lost from a stockout
Why should a firm increase the salvage value of leftover units?
allows a firm to increase profits by providing a high level of product availability
How can the cost of understocking be avoided?
providing a substitute product
How can companies decrease the margin lost in a stockout?
arrange for backup sourcing
4 ways to reduce demand uncertainty
improved forecasting, quick response, postponement, tailored sourcing
What is the effect of an increase in forecast accuracy?
decreases both the overstocked and understocked quantity and increase firm's profits
the set of actions a supply chain takes to reduce the replenishment lead time
When are buyers able to make accurate forecasts?
once they have observed sales for the first week or two in the season
It is possible to provide the same level of product availability to the customer with less inventory is what?
a second, follow-up order is allowed after observing some sales
a firm using production with postponement to satisfy a part of its demand with the rest being satisfied without postponement
firm uses a combination of two supply sources, one focusing on cost but unable to handle uncertainty well, and the other focusing on flexibility to handle uncertainty but at a higher cost
In volume-based tailored sourcing, where is each part of the product's demand produced?
the predictable part is produced in an efficient facility whereas the uncertain portion is produced at a flexible facility