Chapter 11 Flashcards
Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to
exploit economies of scale and lower cost.
The quantity of inventory that a stage of the supply chain either produces or purchases at a given time is
a lot or batch.
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 is
cycle inventory.
A graphical plot depicting the level of inventory over time is
an inventory profile.
When demand is steady, cycle inventory and lot size are related as
Cycle Inventory = Q/2.
Average flow time resulting from cycle inventory is equal to
Cycle Inventory/Demand = Q/2D.
Cycle inventory is primarily held to
take advantage of economies of scale and reduce cost within the supply chain.
Which of the following is NOT a cost that must be considered in any lot sizing decision?
Manufacturing cost per unit, $M/unit
Which of the following are costs that must be considered in any lot sizing decision?
- Average price per unit purchased, $C/unit
- Fixed ordering cost incurred per lot, $S/lot
- Holding cost incurred per unit per year, $H/unit/year = hC
The primary role of cycle inventory is to allow different stages in the supply chain to
purchase product in lot sizes that minimize the sum of the material, ordering, and holding cost.
Economies of scale in purchasing and ordering motivate a manager to
increase the lot size and cycle inventory.
The price paid per unit is referred to as
the material cost and is denoted by C.
All costs that do not vary with the size of the order but are incurred each time an order is placed are referred to as
the fixed ordering cost and is denoted by S.
The cost of carrying one unit in inventory for a specified period of time, usually one year, is referred to as
the holding cost and is denoted by H.
Which of the following would NOT be an example of a fixed ordering cost?
Labor cost incurred to manufacture a part
Which of the following would be an example of a fixed ordering cost?
- Administrative cost incurred to place an order
- Trucking cost incurred to transport an order
- Labor cost incurred to receive an order
Which of the following would NOT be included in holding cost?
Cost of manufacturing
Which of the following would be included in holding cost?
- Cost of capital
- Cost of physically storing the inventory
- Cost that results from the product becoming obsolete
Total ordering and holding costs
Are relatively stable around the economic order quantity.
If demand increases by a factor of k, the optimal lot size increases by a factor of
the square root of k.
Aggregating across products, retailers, or suppliers in a single order allows for
a reduction in purchase price per unit.
Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because
fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers.
A key to reducing cycle inventory is
the reduction of lot size.
A key to reducing lot size without increasing costs is to
reduce the fixed cost associated with each lot.
A price discount where the pricing schedule offers discounts based on the quantity ordered in a single lot is
lot size based.
A price discount where the discount is based on the total quantity purchased over a given period, regardless of the number of lots purchased over that period is
volume based.
Pricing schedules with all unit quantity discounts encourage retailers to
decrease the size of their lots.
In the pricing schedule for marginal unit quantity discounts
the marginal cost of a unit decreases at a breakpoint.
Quantity discounts lead to
a significant buildup of cycle inventory in the supply chain.
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 cost.
In a supply chain where each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit,
supply chain profit is lower than a coordinated solution.
For products where the firm has market power, coordination in the supply chain can be achieved and supply chain profits maximized through the use of
two-part tariffs or volume based quantity discounts.
The practice where a firm charges differential prices to maximize profits is
price discrimination.
Discounts related to price discrimination will be
volume based.
The goal of trade promotions is to
influence retailers to act in a way that helps the manufacturer achieve its objectives.
Which of the following is NOT a key goal (from the manufacturer’s perspective) of a trade promotion?
Shift inventory from the retailer to the customer.
Which of the following are key goals (from the manufacturer’s perspective) of a trade promotion?
- Induce retailers to use price discounts, displays, or advertising to spur sales.
- Shift inventory from the manufacturer to the retailer and the customer.
- Defend a brand against competition.
Which of the following is a possible response that a retailer could make to a trade promotion?
-Pass through some or all of the promotion to customers to spur sales.
and
Pass through very little of the promotion to customers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price.
When the retailer decides to pass through some or all of the promotion to customers to spur sales, the result is
-a lowering of the price of the product for the end customer.
and
-increased purchases and thus increased sales for the entire supply chain.
When the retailer decides to pass through very little of the promotion to customers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price, the result is
an increase in the amount of inventory held at the retailer.
The manufacturer can justify offering trade promotions resulting in forward buying by retailers when
-they have inadvertently built up a lot of excess inventory.
and
-the forward buy allows the manufacturer to smooth demand by shifting it from peak to low-demand periods.
The retailer can justify the forward buying when
it decreases his total cost.
Cycle inventory exists in a supply chain because different stages exploit economies of scale to
lower total cost.
Inventory holding cost does NOT include which of the following?
Ordering cost
Inventory holding cost includes which of the following?
- Cost of capital
- Handling cost
- Occupancy cost
Ordering costs would include which of the following?
Transportation cost
Inventory holding costs would include which of the following?
Obsolescence cost
Which of the following is NOT an input for Lot Sizing for a Single Product?
Order size
Which of the following is an input for Lot Sizing for a Single Product?
- Annual demand
- Cost per unit
- Fixed cost incurred per order
________ is the practice whereby a firm charges differential prices to maximize profits.
Price discrimination
A(n) ________ occurs when a retailer purchases in the promotional period for sales in future periods.
Forward buy
Trade promotions lead to a significant ________ in lot size and cycle inventory because of forward buying by the ________.
increase, retailer
Discuss the role of cycle inventory in the supply chain.
The primary role of cycle inventory is to allow different stages in the supply chain to purchase product in lot sizes that minimize the sum of the material, ordering, and holding cost. If a manager were considering the holding cost alone, he or she would reduce the lot size and cycle inventory. Economies of scale in purchasing and ordering, however, motivate a manager to increase the lot size and cycle inventory. A manager must make the trade-off that minimizes the total cost when making the lot sizing decision. Ideally, cycle inventory decisions should be made considering the total cost across the entire supply chain. In practice, however, each stage often makes its cycle inventory decisions independently. As we discuss later in the chapter, this practice increases the level of cycle inventory as well as the total cost in the supply chain.
Any stage of the supply chain exploits economies of scale in its replenishment decisions in the following 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 discounts or holds trade promotions.
Cycle inventory exists in a supply chain because different stages exploit economies of scale to lower total cost. The costs considered include material cost, fixed ordering cost, and holding cost. The supply chain operation phase operates on a weekly or daily time horizon and deals with decisions concerning individual customer orders.
Describe the impact of trade promotions on cycle inventory.
Manufacturers use trade promotions to offer a discounted price and a time period over which the discount is effective. The goal of trade promotions is to influence retailers to act in a way that helps the manufacturer achieve its objectives. A few of the key goals (from the manufacturer’s perspective) of a trade promotion are as follows:
1. Induce retailers to use price discounts, displays, or advertising to spur sales.
2. Shift inventory from the manufacturer to the retailer and the customer.
3. Defend a brand against competition.
In response to a trade promotion, the retailer has the following options:
1. Pass through some or all of the promotion to customers to spur sales.
2. Pass through very little of the promotion to customers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price.
The first action lowers the price of the product for the end customer, leading to increased purchases and thus increased sales for the entire supply chain. The second action does not increase purchases by the customer but increases the amount of inventory held at the retailer. As a result, the cycle inventory and flow time within the supply chain increase.
Trade promotions lead to a significant increase in lot size and cycle inventory because of forward buying by the retailer. This generally results in reduced supply chain profits unless the trade promotion reduces demand fluctuations.
The retailer can justify the forward buying because it decreases his total cost. In contrast, the manufacturer can justify this action only if they have either inadvertently built up a lot of excess inventory or the forward buy allows the manufacturer to smooth demand by shifting it from peak to low-demand periods. In practice, manufacturers often build up inventory in anticipation of planned promotions. During the trade promotion, this inventory shifts to the retailer, primarily as a forward buy. If the forward buy during trade promotions is a significant fraction of total sales, manufacturers end up reducing the revenues they earn from sales because most of the product is sold at a discount. The increase in inventory and the decrease in revenues often leads to a reduction in manufacturer profits as a result of trade promotions. Total supply chain profits also decrease because of an increase in inventory.
The XYZ Company has an assembly plant in Cincinnati and its parts plant in Indianapolis. Parts are transported from Indianapolis to Cincinnati using trucks. Each shipment costs $100. The Cincinnati plant assembles and sells 300 finished products each day and operates 50 weeks a year. Part #456 costs $50 and XYZ Company incurs a holding cost of 20 percent per year. How many of part #456 should XYZ Company put in each shipment? What is the cycle inventory of part #456 at XYZ Company?
Q = = = 1224.745 ≈ 1225 Average cycle inventory = Q*/2 = 1225/2 = 612.5
Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, how much should Tastee Mart order in each replenishment lot? If a trade promotion lowers the price of Frostee Flakes to $1.80 for a month, how much should Tastee Mart order given the short-term price reduction?
Q* = = = 2943.92 ≈ 2944 Qd = (dD)/(C - d)h + CQ*/(C - d) = (.2 x 26,000)/(2 - .2).3 + (2 x 2944)/(2 - .2) = 12,900.74 ≈ 12,901 Forward buy = Qd - Q* = 12,901 - 2944 = 9,957
