Managing Economies of Scale in Supply Chain

Cycle Inventory
The average inventory in the supply chain due to either production or purchases in the lot sizes that are larger than those demanded by the customer. Cycle Inventory = Lot size (Q) 2

Average Flow Time

According to Little`s Law: Average Flow time = Avg. Inventory Avg. flow rate

Economies of scale to exploit fixed cost

Annual Material cost(material purchased)= CD C = Cost per unit D= Annual demand of the product Annual order cost = D/Q*S Q= Order qty. S = Fixed cost incurred per order Annual holding cost= Q/2*H H = hC h= holding cost/year as a fraction of product cost

SAFETY INVENTORY
Inventory carried out for the purpose of satisfying demand that exceeds the amount forecasted for a given period. Demand forecast is uncertain and product shortage may occur if the actual demand exceeds the forecasted demand. It is significant in industries where product cycle is short and demand is volatile.

EXAMPLE..
Bloomingdale is a high end department store sells purses purchased from Gucci . B orders 600 purses from G. Time taken for the order to arrive = 3 weeks B demand averages to 100 purses per week If there is no uncertain demand -> B orders the replenishment stock just when 300 purses are left. However , Demand Forecast is uncertain , so now B places order to G when they have 400 purses in stock . This ensures product availability . When the new stock arrives there will be 100 purses remaining.

FACTORS DETERMINING APPROPRIATE LEVEL OF SAFETY INVENTORY

Uncertainty of both demand and supply Desired level of product availability Measuring demand uncertainty:
P=
=1

Where k is the time period k = 1,2.. n

D= average demand per period d= Standard Deviation of Demand per period.

 cov(i,j) = covariance of demand between periods i and j. = [ =1 2 + 2i>j cov(i,j)] Covariance : cov(i,j) = pij P=kD; = kD Cv= /u

Measuring product Availability

Product availabilty reflects a firms ability to fill a customer order out of available inventory. A stock out results fills if a customer order arrives when product is not available.

Measures
Product fill rate Fraction of product demand that is satisfied from product in inventory. Order fill rate Fraction of orders that are filled from available inventory. It tends to be lower than product fill rate as products must be in stock for an order to be filled. Cycle service level fraction of replenishment cycles that end with all the customer demand being met.

Replenishment policies
It consist of decisions regarding when to reorder and how much to reorder. Continuous Review Inventory is continuously trapped and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP). Size of the order doesnt change from one order to the next. The time between orders may fluctuate with given variable demand. Periodic review Inventory status is checked at regular periodic intervals and an order is placed to raise the inventory level to a specified threshold. In this the time between orders is fixed however demand can fluctuate.