4.2 Managing Economies of Scale (2)

Question 1

Lot sizing with multiple products or customers (2 approaches)

Answer 1

• each product inventory system could be independently optimised
• a manager can jointly order multiple items

Question 2

Aggregating multiple products order

Answer 2

• transportation is a significant contributor to the fixed cost per order
• allows for reduction in lot size for individual products because fixed ordering and transportation costs are spread across these products, retailers, or suppliers

Question 2

Aggregating multiple products in a single order

Answer 2

• saving transportation costs
  reduces fixed cost for each product
  lot size for each product can be reduced
  cycle inventory is reduced

Question 3

Possible ways of aggregating

Answer 3

• combining shipments of different products from the same supplier
• combining deliveries from multiple suppliers to a facility

Question 4

Pricing Schedule

Answer 4

displays economies of scales
prices decreasing as lot size increases
- all-unit quantity discount
- marginal unit quantity discount or multi-block tariffs

Question 5

Retailers objective when deciding on lot sizes

Answer 5

to minimise the sum of material and holding costs

Question 6

Steps for retailer to decide on lot size:

Answer 6

1. evaluate the optimal lot size for each price
2. select the order quantity for each price
3. for each interval, calculate the total annual cost of the system with order quantity
4. select order quantity with the lowest total annual cost