SCM Test 4


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

cycle inventory

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

cycle inventory

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

obsolescence cost

includes only incremental receiving and storage costs that vary with the quantity of product received

handling cost

the incremental change in space cost due to changing cycle inventory

occupancy cost

the incremental time of the buyer placing an extra order

buyer time

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

order EOQ

If EOQ < K then

order K

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?

volume based

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

price discrimination

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

trade promotions

occurs when a retailer purchases in the promotional period for sales in future periods

forward buy

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

safety inventory

average inventory remaining when replenishment arrives

safety inventory

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

lead time

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

replenishment cycle

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

continuous review

inventory status is checked at regular periodic intervals and an order is placed to raise the inventory level to a specified threshold

periodic review

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?

periodic review

Inventory between a stage and the final customer is called what?

echelon inventory

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

quick response

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

tailored 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

tailored sourcing

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