Variability and Inventory Management Flashcards
How does the demand “Build-up” work?
- Consumer Sales at Retailer
- Retailer’s Order to Wholesaler
- Wholesaler’s Orders to Manufacturer
- Manufacturer’s Orders with Supplier
What is the bullwhip effect?
- Orders to suppliers tend to have a larger variability than sales to buyers, which results in an amplified demand variability upstream
- E.g.: Orders for machine tools fluctuate more than the manufacturing of the main customer
What are the impacts of the bullwhip effect?
- Manufacturing cost↑
- Inventory cost ↑
- Replenishment lead time ↑
- Transportation cost ↑
- Shipping and receiving cost ↑
- Level of product availability ↓
-> Profit of the SC decreases, as the higher level of product availability causes costs to increase
-> (Growing) lack of communication between supplier and manufacturer
What are cause-effect relationships?
- Demand fluctuations are increasing when each stage of the SC plans individually (sequential/uncoordinated planning)
What are different types of obstacles in a supply chain?
- Incentive Obstacles
- Information-Processing Obstacles
- Operational Obstacles
- Pricing Obstacles
- Behavioral Obstacles
What are incentive obstacles?
- Local optimization: Decisions based on maximizing profits of only a single stage, without considering overall SC profits
- Sales Force Incentives: Incentive systems, which reward sell-in, not sell-through, lead to order variability being larger than customer demand variability
What are information-processing obstacles?
- Forecasting based on orders and not customer demand
- Lack of information sharing
Short-term sales promotions can cause retailers to increase their order quantity
Manufacturers may interpret this as a permanent increase in demand
The lack of information results in a high inventory level
What are operational obstacles?
- Ordering in large lots: e.g. due to high fixed costs or quantity discounts for the batch size
- Large replenishment lead times: demand is overestimated, this translates into a higher forecast and order quantity. Distortion is magnified if replenishment lead times are long
- Rationing and shortage gaming
Limited capacity, production quantities are allocated to retailers in proportion to their order quantities → Incentive for retailers to increase their order quantity to receive more supply
manufacturer interprets this as increase in demand
What are pricing obstacles?
- Lot-size-based quantity discounts: Discounts based on lot size increase lot size of orders
→ magnify the bullwhip effect - Price fluctuations: Trade discounts by the manufacturer result in retailers order large lots during the discounting period to cover future demand
What are behavioral obstacles?
- Different stages blame another for fluctuations (enemies rather than partners in SC)
- No stage of the SC learns from its actions
- A lack of trust leads to opportunistic behavior
Name different types of inventory management
- Deterministic Inventory Management
- Inventory Management under Uncertainty
What is a deterministic inventory management?
- Demand, replenishment times and costs are known
- Fixed costs incurred per order
- Inventory holding costs
-> Determine the optimal cycle inventory
-> Determine optimal lot sizes
What is inventory management under uncertainty?
- Demand, replenishment times, revenues, costs are uncertain
- Overstock results in costs
- Understock results in costs
-> Identify the inventory / service level to maximize profit
-> Identify the safety inventory to minimize cost
What is cycle inventory?
Cycle inventory is 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 (D)
How is the cycle inventory calculated?
Cycle Inventory=(lot size)⁄2=Q⁄2
Lot size (Q): Lot or batch size is the quantity that a stage of a supply chain either produces or purchases at a time
How is the average flow time resulting from cycle inventory calculated?
Average time that a product is in the SC in addition to the production-related lead time
Average flow time_CI = (Cycle Inventory) ⁄ Demand = CI ⁄ D = Q ⁄ 2D
What are the assumptions for cycle inventory?
- Lot size dependent costs:
Material cost (average price per unit purchased) 𝐶
Holding cost 𝐻 = ℎ𝐶 (with inventory cost rate ℎ as fraction of unit cost of product)
Fixed ordering cost incurred per lot S - Ordering in large lot sizes decreases ordering costs, but increases holding costs
What is the objective of cycle inventory?
- Minimizing the sum of material costs, ordering costs and inventory holding costs
- Determining the optimal lot size
Name insights into cycle inventory
- CI are caused by deviations between lot sizes and demand, due to economies of scale
- High cycle inventories lead to a high capital commitment / bound assets
- Cycle inventories lead to an increase of the average flow time
- When demand fluctuates, high flow times may be problematic
- Larger lot sizes cause an increase in variability in subsequent stages
- Aggregating orders of multiple products to reduce fixed costs, despite small lot sizes of the individual products
What are collective orders?
- Aggregation of orders over products or suppliers causes the total lot size to decrease due to the allocation of fixed ordering costs and transportation costs
- Cycle inventory and average flow time decrease as well
- Some types of costs might increase with an increase in product variety, others are independent of product variety
Name three approaches for collective orders
- Separate order for each product
- Collective order across all products
- Collective order, not every order contains every product; each lot selected subset of products
What are cycle inventory related costs?
- Inventory Holding Costs: Cost of capital, Obsolescence cost, Handling cost, Holding cost, Energy costs, Insurance, Tax, Miscellaneous costs
- Ordering Costs: Personnel Costs, Transportation costs, Receiving costs / quality control, Other costs
