Cycle Inventory O:Quantity in a lot or batch size Inventory D:Demand per unit time lot size Cycle inventory 2= 2 2 average inventory Average flow time average flow rate Time t Average flow time resulting from cycle inventory cycle inventory = demand 2D Under this case,Why is the cycle inventory =Q/2? SEIEE AU406 6
+ - SEIEE AU406 Cycle Inventory Under this case, Why is the cycle inventory =Q/2? 6
Cycle Inventory ■ Let us consider the cycle inventory of jeans at Jean- Mart The demand for jeans is D =100 pairs of jeans per day The store manager at Jean-Mart currently purchases in lots of Q=1,000 pairs It takes 10 days for an entire lot to be sold For a lot size of 1,000 units,Jean-Mart carries a cycle inventory of Q/2=500 pairs of jeans. Average flow time Q/2D =5days SEIEE AU406 10-7
+ - SEIEE AU406 Let us consider the cycle inventory of jeans at JeanMart The demand for jeans is D =100 pairs of jeans per day The store manager at Jean-Mart currently purchases in lots of Q =1,000 pairs It takes 10 days for an entire lot to be sold For a lot size of 1,000 units, Jean-Mart carries a cycle inventory of Q/2=500 pairs of jeans. Average flow time = Q/2D =5days 10-7 Cycle Inventory
Role of Cycle Inventory in a Supply Chain Cycle inventory adds 5 days to the time a unit spends in the supply chain Lower cycle inventory is better because: Average flow time is lower Working capital requirements are lower Lower inventory holding costs ■( Cycle inventory is held to take advantage of economies of scale and reduce cost within a supply chain. We first identify supply chain costs that are influenced by lot size. SEIEE AU406 8
+ - SEIEE AU406 Role of Cycle Inventory in a Supply Chain Cycle inventory adds 5 days to the time a unit spends in the supply chain Lower cycle inventory is better because: Average flow time is lower Working capital requirements are lower Lower inventory holding costs Cycle inventory is held to take advantage of economies of scale and reduce cost within a supply chain. We first identify supply chain costs that are influenced by lot size. 8
Some Key Costs: Average price paid per unit purchased:The price paid per unit is referred to as the materia/cost and is denoted by C.It is measured in $/unit. Fixed ordering cost:all costs that do not vary with the size of the order but are incurred each time an order is placed(denoted by S and measured in $/lot) Transportation,labor costs. Ho/ding cost is the cost of carrying one unit in inventory for a specified period of time,usually one year(denoted by Hand is measured in $/unit/year) Holding cost fraction h:H=hC SEIEE AU406 10-9
+ - SEIEE AU406 Average price paid per unit purchased: The price paid per unit is referred to as the material cost and is denoted by C. It is measured in $/unit. Fixed ordering cost: all costs that do not vary with the size of the order but are incurred each time an order is placed(denoted by S and measured in $/lot) Transportation, labor costs. Holding cost is the cost of carrying one unit in inventory for a specified period of time, usually one year(denoted by H and is measured in $/unit/year) Holding cost fraction h: H=hC 10-9 Some Key Costs:
Role of Cycle Inventory in a Supply Chain Cycle inventory is held primarily to take advantage of economies of scale in the supply chain Supply chain costs influenced by lot size: Material cost C Fixed ordering cost S Holding cost H hC (h cost of holding $1 in inventory for one year) Primary role of cycle inventory is to allow different stages to purchase product in lot sizes that minimize the sum of material,ordering,and holding costs Ideally,cycle inventory decisions should consider costs across the entire supply chain,but in practice,each stage generally makes its own supply chain decisions -increases total cycle inventory and total costs in the supply chain SEIEE AU406 10
+ - SEIEE AU406 Role of Cycle Inventory in a Supply Chain Cycle inventory is held primarily to take advantage of economies of scale in the supply chain Supply chain costs influenced by lot size: Material cost = C Fixed ordering cost = S Holding cost = H = hC (h = cost of holding $1 in inventory for one year) Primary role of cycle inventory is to allow different stages to purchase product in lot sizes that minimize the sum of material, ordering, and holding costs Ideally, cycle inventory decisions should consider costs across the entire supply chain, but in practice, each stage generally makes its own supply chain decisions – increases total cycle inventory and total costs in the supply chain 10