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SCM 07 Chapter 11

Supply Chain

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40 views25 pages

SCM 07 Chapter 11

Supply Chain

Uploaded by

clinton.p
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Managing economies of scale in

supply chain cycle inventory


- Chapter 11
- JEB
Economies of scale to exploit quantity discounts

Consider pricing schedules that encourage buyers to purchase in


large lots. There are many instances in business-to-business
transactions in which the pricing schedule displays economies of
scale, with prices decreasing as lot size increases. A discount is
lot-size based if the pricing schedule offers discounts based on
the quantity ordered in a single lot. A discount is volume based if
the discount is based on the total quantity purchased over a
given period, regardless of the number of lots purchased over
that period.
Economies of scale to exploit quantity discounts
All unit quantity discounts Marginal unit quantity discount or
multi-block tariffs
Why Do Suppliers Offer Quantity Discounts?

• Improved coordination to increase total


supply chain profits
• Extraction of surplus by the supplier through
price discrimination
Price discrimination to maximise supplier profits
Price discrimination is the practice in which a firm charges different
prices to maximize profits.
Short term discounting – Trade promotions

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 trade promotion, the retailer has the following options:
• Pass through some or all the promotions to customers to spur sales.
• 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.
Learning objectives

1. Balance the appropriate costs to choose the optimal lot size and
cycle inventory in a supply chain.
2. Understand the impact of quantity discounts on lot size and cycle
inventory.
3. Devise appropriate discounting schemes for a supply chain.
4. Understand the impact of trade promotions on lot size and cycle
inventory.
5. Identify managerial levers that reduce lot size and cycle inventory in
a supply chain without increasing cost.
• CEO X
• 2008
• Opening inventory – 50 crores
• Opening cash in hand – 50 crores
• Closing inventory – 0 crores
• Profit for the year – 50 crores
Financial • What is the closing cash in hand - ?
• CEO – You
situation • 2009
• Opening inventory – 0 crores
• Opening cash in hand – ?? crores
• Closing inventory – 100 crores
• Profit for the year – 50 crores
• What is the closing cash in hand - ?
The role of a cycle inventory in a supply chain

• A lot or batch size is the quantity that a stage of a supply chain


either produces or purchases at a time.
• 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.
• Factors affecting ordering :
• Average price paid per unit purchased
• Fixed ordering cost
• Holding cost
• Inventory holding cost
• Cost of capital
• Spoilage cost
Estimating cycle • Handling cost
• Occupancy cost
inventory related • Miscellaneous cost
costs • Ordering cost
• Buyer time
• Transportation costs
• Receiving costs
• Other costs
Economies of scale to
exploit fixed costs

• Lot sizing for a single product


(Economic order quantity)
• Production lot sizing
• Lot sizing with capacity
constraints
Aggregating multiple
products in a single order
The Key to reducing lot size is the reduction of the
fixed cost incurred per lot. One major source of
fixed costs is transportation. In several companies,
the array of products sold is divided into families
or groups, with each group managed
independently by a separate product manager.
This results in separate orders and deliveries for
each product family, thus increasing the overall
cycle inventory. Aggregating orders and deliveries
across product families is an effective mechanism
to lower cycle inventories
Lot Sizing with Multiple Products or Customers

• The store manager may consider three approaches to the lot-


sizing decision:
1. Each product manager orders his or her model
independently.
2. The product managers jointly order every product in each
lot.
3. Product managers order jointly but not every order
contains every product; that is, each order contains a
selected subset of the products.
Managing multi-echelon cycle inventory

• A multi-echelon supply chain has multiple stages and


possibly many players at each stage. The lack of
coordination in lot sizing decisions across the supply
chain results in high costs and more cycle inventory
than required. The goal of a multi-echelon system is to
decrease total costs by coordinating orders across the
supply chain.
Integer replacement policy

• An integer replenishment policy has every player


ordering periodically, with the length of the
reorder interval for each player an integer
multiple of some base period.
Integer replenishment policies for the supply:

• Divide all parties within a stage into groups such that all parties within a
group order from the same supplier and have the same reorder interval.
• Set reorder intervals across stages such that the receipt of a
replenishment order at any stage is synchronized with the shipment of a
replenishment order to at least one customer. The synchronized portion
can be cross-docked.
• For customers with a longer reorder interval than the supplier, make the
customer’s reorder interval an integer multiple of the supplier’s interval
and synchronize replenishment at the two stages to facilitate cross-
docking. In other words, a supplier should cross-dock all orders from
customers that reorder less frequently than the supplier.
Summary

• 1. Balance the appropriate costs to choose the optimal lot size and cycle inventory in a supply chain.
• Cycle inventory generally equals half the lot size. Therefore, as the lot size grows, so does the cycle
inventory. In deciding on the optimal amount of cycle inventory, the supply chain goal is to minimize
the total cost—the order cost, holding cost, and material cost. As cycle inventory increases, so does
the holding cost. However, the order cost and, in some instances, the material cost decrease with an
increase in lot size and cycle inventory. The EOQ balances the three costs to obtain the optimal lot size.
The higher the order and transportation cost, the higher the lot size and cycle inventory.
• 2. Understand the impact of quantity discounts on lot size and cycle inventory.
• Lot–size–based quantity discounts increase the lot size and cycle inventory within the supply chain
because they encourage buyers to purchase in larger quantities to take advantage of the decrease in
price.
• 3. Devise appropriate discounting schemes for a supply chain.
• Quantity discounts are justified to increase total supply chain profits when independent lot-sizing
decisions in a supply chain lead to suboptimal solutions from an overall supply chain perspective. If
suppliers have large fixed costs, suitable lot-size–based quantity discounts can be justified because
they help coordinate the supply chain. Volume-based discounts are more effective than lot-size–based
discounts in increasing supply chain profits without increasing lot size and cycle inventory
• 4. Understand the impact of trade promotions on lot size and cycle inventory.
• Trade promotions increase inventory and total supply chain costs through forward buying, which
shifts future demand to the present and creates a spike in demand followed by a dip. The increased
variability raises inventories and costs.
• 5. Identify managerial levers that reduce lot size and cycle inventory in a supply chain without increasing
cost.
• The key managerial levers for reducing lot size, and thus cycle inventory, in the supply chain without
increasing cost are the following:
• Reduce fixed ordering and transportation costs incurred per order.
• Implement volume-based discounting schemes rather than individual lot-size–based
discounting schemes.
• Eliminate or reduce trade promotions and encourage EDLP. Base trade promotions on sell-
through rather than sell-in to the retailer.
Thank you

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