IDIS 424 Lect 10-16 Flashcards
When do you use Hand-To-Mouth?
- Price goes down
- Emergency
- Short on working capital or storage space
- Used when the goods are only occasional and not taken into stock
- Perishables
Hand-to-Mouth Buying
purchase by a business in the smallest feasible quantities for immediate requirements. Also known as Zero Stock Buying or Just in time
TCO Hand-To-Mouth
- Item cost Ct at period time t (unit price)
- Fixed order setup cost K
- Inventory holding cost per unit per period, h
H2M TCO tips
- Take the purchase cost
- Take the order setup costs (if monthly k*number of orders)
- Inventory holding cost you take your avg. inv (total divided by 2) then multiply by h
- Add all of them together
Forward Buying
Policy for buying in advance of the time when item is actually needed
When do you use forward buying?
- Price goes up
- Manufactures offer quantity discounts in a short period
- Future availability of the product is limited
What are the costs associated with Forward Buying?
- Warehouse storage expense
- Cost of tying your money up in inventory when it could otherwise be used to earn a better return
- Insurance cost
Mixed Buying Strategy
- Combination of hand-to-mouth and forward strategies
- Applies if an item has a predictable seasonal price pattern
Total sourcing cost
cost of goods + transportation cost
Mathematical optimization
In optimization, decision variables (shipping quantities) are related to parameters (shipping costs and cost of goods) to calculate objective function (total sourcing cost)
Decision Variables
amount shipped from supplier i to customer j
“Prisoner Dilemma” in SCM
- The distributor takes all risks but the manufacturer takes no risk from the market.
- Manuf. wants dist. to carry large inv. to ensure satisfied demand
- Dist. would prefer less inv. to reduce overstock risk
- Dist. orders quantity based on own consideration – often results in suboptimal supply chain performance
Shortcomings occur because?
dist. and supplier are both trying to maximize profits independently
Contracts
Agreement btw two parties. Usually designed to encourage dist. to purchase more and supplier to take some of the overstock risk
Buyback Contract
Allows dist. to return unsold inventory at the agreed buyback price higher than salvage value s.
Reason for buyback cont.
Gives dist. an incentive to order more units since overstock is shared with supplier
Adv. of buyback contracts
Profits for both dist. and supplier tend to be higher
Risk of buyback contract
- Results in surplus inventory for supplier
- requires the supplier to have an effective reverse logistics
- the buyer may have incentive to push similar items that are not under buy-back
Revenue-Sharing Contract
Dist. shares some of its revenue with suppliers, in return for a discount on purchasing price. The buyer transfers a portion of revenue from each unit sold to end customer. Results in dist. to order more due to smaller overstocking risk
Quantity-Flexible contract
Supplier provides full refund for return (unsold) items as long as the number of returns is no larger than a certain quantity
Sales Rebate Contract
Provide direct incentive to retailer to increase sales by means of a rebate paid by the supplier for any item above certain quantity
Buy-back
Partial refund for all unsold goods
Revenue-Sharing
Buyer shares revenue with supplier in return for discount wholesale price
Quantity-Flexibility
Full refund for a limited number of unsold goods
