Managing Economies of Scale in a Supply Chain

8/19/2019 Managing Economies of Scale in a Supply Chain

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Managing Economies of Scale in

a Supply Chain: Cycle InventoryChapter 11

GROUP Members:Avinash Kumar MahtoAbhishek AnandAnnant Singh Raunkali Jay Shah


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Learning Objectives

1. alance the appropriate costs to choosethe optimal lot si!e an" cycle inventory ina supply chain.

#. $n"erstan" the impact of %uantity

"iscounts on lot si!e an" cycle inventory.&. 'evise appropriate "iscounting schemes

for a supply chain.(. $n"erstan" the impact of tra"e

promotions on lot si!e an" cycle inventory.). I"entify managerial levers that re"uce lot

si!e an" cycle inventory in a supply chain*ithout increasing cost.


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+ole of Cycle Inventoryin a Supply Chain

• Lot or batch size is the %uantity that a stage of asupply chain either pro"uces or purchases at atime

•

Cycle inventory is the average inventory in asupply chain "ue to either pro"uction orpurchases in lot si!es that are larger than those"eman"e" by the customer

,: ,uantity in a lot or batch si!e': 'eman" per unit time


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Cycle inventory = lot size2

= Q2

Average flow time =average inventory

average flow rate

-verage o*time resultingfrom cycleinventory

= cycle inventorydemand

= Q2D


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• Average price paid per unit purchased isa /ey cost in the lot0si!ing "ecision

Material cost C •

Fixed ordering cost inclu"es all coststhat "o not vary *ith the si!e of theor"er but are incurre" each time anor"er is place"

2i3e" or"ering cost S • Holding cost is the cost of carrying one

unit in inventory for a speci4e" perio" oftime

5ol"ing cost H hC


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Economies of scale e3ploite" inthree typical situations

1. - 43e" cost is incurre" each time anor"er is place" or pro"uce"

#. 6he supplier o7ers price "iscountsbase" on the %uantity purchase" per

lot

&. 6he supplier o7ers short0term price"iscounts or hol"s tra"e promotions


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Estimating Cycle Inventory+elate" Costs in 8ractice

Inventory 5ol"ing Cost

◦ Obsolescence cost

◦ 5an"ling cost

◦

Occupancy cost◦ Miscellaneous costs 6heft9 security9 "amage9 ta39 insurance

Or"ering Cost

◦ uyer time

◦ 6ransportation costs◦ +eceiving costs

◦ Other costs


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Economies of Scaleto E3ploit 2i3e" Costs

• Lot si!ing for a single pro"uct EO,; D -nnual "eman" of the pro"uctS = 2i3e" cost incurre" per or"erC = Cost per unit H = 5ol"ing cost per year as afraction of pro"uct cost

•

asic assumptions –'eman" is stea"y at D units per unit time –


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Lot Si!ing for a Single8ro"uct

Annual material cost =CD

Number of orders per year = DQ

Annual ordering cost = DQ

÷S

Annual holding cost = Q

2

÷H =

Q

2

÷hC

Total annual cost TC =CD+ DQ

÷S+

Q

2

÷hC


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2igure 110#


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!ptimal lot size Q" =

2DS

hC

• 6he econoic order !uantity "#Q;

n" = DQ "

= DhC2S

• 6he optimal or"ering fre%uency


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8ro"uction Lot Si!ing

6he entire lot "oes not arrive at the sametime

8ro"uction occurs at a speci4e" rate P

Inventory buil"s up at a rate of P = D

Q$ = 2DS#$– D % $&hC

D

Q$

÷S

-nnual setup cost

#$– D % $& Q$

2

÷hC

-nnual hol"ing cost


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-ggregating Multiple 8ro"uctsin a Single Or"er

Savings in transportation costs

◦ +e"uces 43e" cost for each pro"uct

◦ Lot si!e for each pro"uct can be re"uce"◦ Cycle inventory is re"uce"

Single "elivery from multiple

suppliers or single truc/ "elivering tomultiple retailers

+eceiving an" loa"ing costs re"uce"


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Lot Si!ing *ith Multiple8ro"ucts or Customers

• Or"ering9 transportation9 an"receiving costs gro* *ith thevariety of pro"ucts or pic/up points

• Lot si!es an" or"ering policy thatminimi!e total cost

Di: -nnual "eman" for pro"uct i

S : Or"er cost incurre" each time an or"er isplace"9 in"epen"ent of the variety ofpro"ucts in the or"er

si: -""itional or"er cost incurre" if pro"uct i

is inclu"e" in the or"er


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Multiple 8ro"ucts Or"ere" an"'elivere" In"epen"ently

'eman" D L 1#9>>>?yr9 D M 19#>>?yr9 D H

1#>?yr

Common or"er costS @(9>>>

8ro"uct0speci4c or"er cost s L = @19>>>9 s M @19>>>9 s H = @19>>>

5ol"ing costh = >.#

$nit costC L = @)>>9 C M = @)>>9 C H = @)>>


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Multiple 8ro"ucts Or"ere" an"'elivere" In"epen"ently

Litero Medro !eavyro

'eman" per year 1#9>>> 19#>> 1#>

2i3e" cost?or"er @)9>>> @)9>>> @)9>>>

Optimal or"er si!e 19>A) &(B 11>

Cycle inventory )( 1D& ))

-nnual hol"ingcost

@)(9DD# @1D9 @)9(DD

Or"er fre%uency 11.>?year &.)?year 1.1?year

-nnual or"eringcost

@)(9DD# @1D9 @)9(DD

-verage o* time #.( *ee/s D.) *ee/s #&.D *ee/s

-nnual cost @1>A9)(( @&(9B(# @1>9A)( 6able 1101

• 6otal annual cost @1))91(>


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Lots Or"ere" an" 'elivere" ointly

Annual holding cost = D

LhC

L

2n+ D

%hC

%

2n+ D

HhC

H

2n

S" = S+ sL + s

% + s

H Annual order cost = S" n

Total annual cost = D

LhC

L

2n+ D

%hC

%

2n+ D

HhC

H

2n+ S " n

n" = D

LhC

L + D

%hC

% + D

HhC

H

2S "n" =

DihC

ii=$

& ∑2S "


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8ro"ucts Or"ere" an" 'elivere" ointly

S" = S+ s A

+ s' + s

C = '())) per order

n" = $2))) ×$)) +$2))×$)) +$2) ×$))2 × ()))

= *+(,

-nnual or"er cost A.D) 3 D9>>> @B9#)>

-nnual or"eringan" hol"ing cost @B19)1# F @B91)1 F @B1) F @B9#)>

@1&B9)#


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-ggregation *ith CapacityConstraint

• G.G. Hrainger e3ample

'eman" per pro"uct9 Di = 1>9>>>

5ol"ing cost9 h = >.#

$nit cost per pro"uct9 C i = @)>

Common or"er cost9 S = @)>>

Supplier0speci4c or"er cost9 si = @1>>


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S" = S+ s$ + s

2 + s

- + s

. = '*)) per order

n" = D$hC$i=$.

∑ 2S " = . ×$))))× )+2× ,)2 × *)) = $.+*$

Annual order cost = $.+*$× *)).

= '--,.

= hC

iQ

2= )+2× ,) × /($

2= '--,,-nnual hol"ing

cost persupplier


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6otal re%uire" capacity per truc/ ( 3 BD1

#9B( units

6ruc/ capacity #9)>> units

Or"er %uantity from each supplier #9)>>?(

B#)

Or"er fre%uency increase" to 1>9>>>?B#) 1B

-nnual or"er cost per supplier increases to

@&9B>>

-nnual hol"ing cost per supplier "ecreases to


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Lots Or"ere" an" 'elivere" ointly for a Selecte" Subset

Ste ": I"entify the most fre%uentlyor"ere" pro"uct assuming eachpro"uct is or"ere" in"epen"ently

ni =

hCiDi

2#S+ si&

Ste #: 2or all pro"ucts i ( i9 evaluatethe or"ering fre%uency

ni =

hCiDi

2si


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Ste $: 2or all i ( i9 evaluate thefre%uency of pro"uct i relative to themost fre%uently or"ere" pro"uct i

to be mi i = n % n

i

Ste %: +ecalculate the or"ering

fre%uency of the most fre%uentlyor"ere" pro"uct i to be n

n= hC

iiD

i=$

l∑2 S+ s

i%

i

i=$

l∑( )


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Ste &: Evaluate an or"er fre%uency of ni

= n ) mi an" the total cost of such an

or"ering policy

TC = nS+ nisi

i=$

l

∑ + Di2n

i

÷hC

$

i−$

l

∑

Tailored aggregation = higher0"eman"pro"ucts or"ere" more fre%uently an"lo*er0"eman" pro"ucts or"ere" less

fre%uently


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Or"ere" an" 'elivere" ointly =2re%uency Jaries by Or"er

-pplying Step 1

nL =

hCLD

L

2#S+ sL&= $$+)

n%

= hC

%D%

2#S+ s%

&= -+,

nL =

hCHD

H

2#S+ sH

&= $+$

n = $$+)

6hus


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-pplying Step #

n% =

hC%D%

2s% = (+( and nH =

hCHD

H

2sH = 2+.

• -pplying Step &

%

= n

n%

= $$+)

(+(

= 2 and H =

n

nH

= $$+)

2+.

= ,


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Litero Medro !eavyro

'eman" per year D; 1#9>>> 19#>> 1#>

Or"er fre%uency nK; 11.(D?year ).D(?year #.#A?yearOptimal or"er si!e D?nK;

19>(B #>A )#

Cycle inventory )#& 1>(.) #B

-nnual hol"ing cost @)#9&>D @1>9(B1 @#9B1)

-verage o* time #.#D *ee/s (.)& *ee/s 11.&)*ee/s 6able 110&


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-pplying Step (

n= $$+.(

• -pplying Step )

nL = $$+.( % yr n

% = $$+.( % 2 = ,+(. % yr

nH

= $$+.( % , = 2+2* % yr

-nnual or"er cost 6otal annual cost

nS+nLsL +n

%s%

+ nHsH = '/,-0-+, @1&>9DBD


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Economies of Scale toE3ploit ,uantity 'iscounts

Lot size*based discount + "iscountsbase" on %uantity or"ere" in a singlelot

,olue based discount = "iscount isbase" on total %uantity purchase"over a given perio"

6*o common schemes

◦ -ll0unit %uantity "iscounts

◦ Marginal unit %uantity "iscount or multi0

bloc/ tari7s


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,uantity 'iscounts

6*o basic %uestions

1. Ghat is the optimal purchasing "ecisionfor a buyer see/ing to ma3imi!e pro4ts

5o* "oes this "ecision a7ect the supplychain in terms of lot si!es9 cycleinventories9 an" o* times

#. $n"er *hat con"itions shoul" a supplier

o7er %uantity "iscounts Ghat areappropriate pricing sche"ules that asupplier see/ing to ma3imi!e pro4tsshoul" o7er


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-ll0$nit ,uantity 'iscounts

8ricing sche"ule has speci4e" %uantitybrea/ points q>9 q19 9 qr 9 *here q> >

If an or"er is place" that is at least as

large as qi but smaller than qiF19 then eachunit has an average unit cost of C i

$nit cost generally "ecreases as the

%uantity increases9 i.e.9 C > N C 1 N N C r Objective is to "eci"e on a lot si!e that

*ill minimi!e the sum of material9 or"er9an" hol"ing costs


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2igure 110&


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Ste ": Evaluate the optimal lot si!e foreach price C i9> i r as follo*s

Qi = 2DS

hCi


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Ste #: Ge ne3t select the or"er %uantityQi for each price C i

!i ≤Q

i < !

i+$

Qi < !iQi ≥ !

i+$

1.

#.

&.

• Case & can be ignore" as it is consi"ere" forQiF1

• 2or Case 1 if 9 then set Qi Qi

• If 9 then a "iscount is not possible

• Set Qi qi to %ualify for the "iscounte"

!i ≤Q

i < !

i+$

Qi < !

i


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Ste $: Calculate the total annual cost ofor"ering Qi units

Total annual cost TCi = D

Qi

"

÷÷S+

Qi

"

2

÷÷hCi + DCi


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Ste %: Select Qi *ith the lo*est total

cost TC i

C" = $D

DCr + DS

!r

+ h2!r Cr – 2hDSC

r

• Cuto7 price


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-ll0$nit ,uantity 'iscountE3ample

Order 'uantity Unit Pri(e

>=(9AAA @&.>>

)9>>>=A9AAA @#.AB

1>9>>> or more @#.A#

q> >9 q1 )9>>>9 q# 1>9>>>

C > @&.>>9 C 1 @#.AB9 C # @#.A# D = 1#>9>>>?year9 S = @1>>?lot9 h = >.#


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Step 1

Q) = 2DS

hC)

= /-2.1 Q$ = 2DS

hC$

= /-/(1 Q2 = 2DS

hC2

= /.$)

Step #

Ignore i = > because Q> B9( N q1 )9>>>2or i = 19 #

Q$

" =Q$ = /-/(1 Q

2

" = !2 = $))))


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Step &

TC$ = D

Q$"

÷÷S+ Q

$

"

2

÷÷hC$ + DC$ = '-,0*/*1 TC2 = '-,.,2)

Lo*est total cost is for i #

Or"er bottles per lot at @#.A# per

bottle

Q2

" = $))))


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Marginal $nit ,uantity 'iscounts

• %ulti*bloc& tari-s + the arginalcost of a unit that "ecreases at abrea/point

2or each value of i9 > i r 9 let V i be the

cost of or"ering qi units

, i =C

)#!

$ – !

)& +C

$#!

2 – !

$& + ++++C

i –$#!

i – !

i –$&


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2igure 110(


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Material cost of each or"er Q is V i F Q =

qi;C i

Annual order cost = DQ

÷S

Annual holding cost = , i + #Q – !

i&C

i h% 2

Annual materials cost = DQ, i + #Q – !

i&C

i

= DQ

÷S+ , i + #Q – !i &C i h % 2

+ DQ, i + #Q – !

i&C

i

6otal annualcost


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Ste ": Evaluate the optimal lot si!e foreach price C i

!ptimal lot size for Ci is Q

i =

2D#S+, i – !

iCi&

hCi


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Ste #: Select the or"er %uantity Qi* for

each price C i

f !i ≤Qi ≤ !i+$ then set Qi"

=Qif Q

i < !

i then set Q

i

" = !i

f Qi > !

i+$ then set Qi" = !

i+$

1.#.

&.


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Ste $: Calculate the total annual costof or"ering Qi*

TCi = D

Qi

"

÷÷S+ , i + #Qi

" – !i&C

i

h % 2 +

D

Qi

" ,

i + #Q

i

" – !i&C

i

Ste %: Select the or"er si!e Qi* *iththe lo*est total cost TC i


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Marginal $nit ,uantity 'iscountE3ample

Original "ata no* a marginal "iscount

Order 'uantity Unit Pri(e

>=(9AAA @&.>>

)9>>>=A9AAA @#.AB

1>9>>> or more @#.A#

q> >9 q1 )9>>>9 q# 1>9>>>

C > @&.>>9 C 1 @#.AB9 C # @#.A#

D = 1#>9>>>?year9 S = @1>>?lot9 h = >.#


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, ) = )1 ,

$ = -#,))) – )& = '$,)))

, 2 = -#,))) – )& + 2+*/#$)))) – ,)))& = '2*0))

Ste "

Q) =

2D#S+, ) – !

)C

)&

hC)

= /-2.

Q$ =2D#S+,

$

– !$

C$

&

hC$

= $$)20

Q2 =

2D#S+, 2 – !

2C

2&

hC2

= $/*/$


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Ste# Q)

" = !$ = ,))) because Q

) = /-2. > ,)))

Q$

" = !2 = $))))1 Q

2 = Q

2 = $/*/$

Ste$TC

) = D

Q)

"

÷÷S+ , ) + #Q)

" – !)&C

)

h% 2 +

D

Q)

" ,

) + #Q

)

" – !)&C

)

= '-/-*))

TC2 = D

Q2

"

÷÷S+ , 2 + #Q2

" – !2&C

2

h% 2 +

D

Q2

" ,

2 + #Q

2

" – !2&C

2

= '-/)-/,

TC$ = DQ

$

"

÷÷S+ , $ + #Q$

" – !$&C $ h% 2 + DQ$

" , $ + #Q$" – !$&C$ = '-/$(0)


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Ghy ,uantity 'iscounts

,uantity "iscounts can increasethe supply chain surplus for the

follo*ing t*o main reasons1. Improve" coor"ination to increase

total supply chain pro4ts

#. E3traction of surplus through price

"iscrimination


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,uantity 'iscounts forCommo"ity 8ro"ucts

D = 1#>9>>> bottles?year9 S R @1>>9 h R >.#9 C R

@&

S M @#)>9 h M >.#9 C M @#

Q. =

2DS.

h.C

. =2×$2)))) ×$))

)+2× - = /-2.

Annual cost for 3! = D

Q.

÷S

. + Q

.

2

÷h

.C

. = '-(*,

Annual cost for manufacturer = DQ

.

÷S

% + Q.

2

÷h

%C%

= '/))*

-nnual supply chaincost manufacturer F

'O;

@B9>>A F @&9DA) @A9>(


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Locally Optimal Lot Si!es

= D

Q

÷S. +

Q

2

÷h.C. +

D

Q

÷S% +

Q

2

÷h%C%

-nnual cost for'O an"manufacturer

Q" =2D#S

. +S

%&

h.C

. +h%C% = *$/,

Annual cost for 3! = DQ "

÷S. +

Q "

2

÷h.C. = '.),*

Annual cost for manufacturer = DQ "

÷S% +

Q "2

÷h%C% = ',$)/

-nnual supply chaincost manufacturer F

'O;

@)91>B F @(9>)A @A91B)


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'esigning a Suitable Lot Si!e0ase" ,uantity 'iscount

'esign a suitable %uantity "iscount thatgets 'O to or"er in lots of A91B) units*hen its aims to minimi!e only its o*n

total costsManufacturer nee"s to o7er an

incentive of at least @#B( per year to'O in terms of "ecrease" material cost

if 'O or"ers in lots of A91B) units-ppropriate %uantity "iscount is @& if

'O or"ers in lots smaller than A91B)

units an" @#.AAD for or"ers of A91B) or

, i i h


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,uantity 'iscounts Ghen2irm 5as Mar/et 8o*er

'eman" curve &B>9>>> = B>9>>> p

8ro"uction cost C M = @# per bottle

$ro/ . = # p –C

.-/)))) – /)))) p&

$ro/ % = #C. –C% -/)))) – /)))) p&

p to ma3imi!e Prof R p= - +C

.

2

$ro/ %

= #C. –C

%& -/)))) – /)))) - + C.

2

÷

= #C

. – 2$0)))) – -))))C

.&

, i 'i Gh


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,uantity 'iscounts Ghen2irm 5as Mar/et 8o*er

C R = @( per bottle9 p @) per bottle

6otal mar/et "eman" &B>9>>> = B>9>>> p = B>9>>>

Prof R ) = (;&B>9>>> = B>9>>> P ); @B>9>>>

Prof M = ( = #;&B>9>>> = B>9>>> P );

@1#>9>>>

Prof SC p = C M ;&B>9>>> = B>9>>> p;

Coor"inate" retail price p= - +C%

2 = - +2

2 = '.

Prof SC @( = @#; 3 1#>9>>> @#(>9>>>


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6*o08art 6ari7

Manufacturer charges its entirepro4t as an up0front franchise fee ff

Sells to the retailer at cost

+etail pricing "ecision is base" onma3imi!ing its pro4ts

E7ectively ma3imi!es thecoor"inate" supply chain pro4t

J l " , tit


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Jolume0ase" ,uantity'iscounts

'esign a volume0base" "iscountscheme that gets the retailer to

purchase an" sell the %uantity sol"*hen the t*o stages coor"inatetheir actions


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Lessons from 'iscounting Schemes

,uantity "iscounts play a role in supply chaincoor"ination an" improve" supply chainpro4ts

'iscount schemes that are optimal are volumebase" an" not lot si!e base" unless themanufacturer has large 43e" costs associate"*ith each lot

Even in the presence of large 43e" costs for

the manufacturer9 a t*o0part tari7 or volume0base" "iscount9 *ith the manufacturerpassing on some of the 43e" cost to theretailer9 optimally coor"inates the supply

chain an" ma3imi!es pro4ts


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Lessons from 'iscounting Schemes

Lot si!e=base" "iscounts ten" to raise thecycle inventory in the supply chain

Jolume0base" "iscounts are compatible *ithsmall lots that re"uce cycle inventory

+etailers *ill ten" to increase the si!e of thelot to*ar" the en" of the evaluation perio"9the hoc&ey stic& phenoenon

Gith multiple retailers *ith "i7erent "eman"curves

optimal "iscount continues to bevolume base" *ith the average price charge"to the retailers "ecreasing as the rate ofpurchase increases

8 i 'i i i ti t M i i


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8rice 'iscrimination to Ma3imi!eSupplier 8ro4ts

2irm charges "i7erential prices toma3imi!e pro4ts

Setting a 43e" price for all units "oes not

ma3imi!e pro4ts for the manufacturerManufacturer can obtain ma3imum pro4ts

by pricing each unit "i7erently base" oncustomersQ marginal evaluation at each

%uantity,uantity "iscounts are one mechanism for

price "iscrimination because customers

pay "i7erent prices base" on the %uantity

Sh t 6 'i ti


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Short06erm 'iscounting: 6ra"e 8romotions

6ra"e promotions are price"iscounts for a limite" perio" oftime

Rey goals1. In"uce retailers to use price

"iscounts9 "isplays9 or a"vertising to

spur sales#. Shift inventory from the

manufacturer to the retailer an" thecustomer

&. 'efen" a bran" against competition

Sh t 6 'i ti


61/76

Short06erm 'iscounting: 6ra"e 8romotions

Impact on the behavior of theretailer an" supply chainperformance

+etailer has t*o primary options1. 8ass through some or all of the

promotion to customers to spur sales

#. 8ass through very little of thepromotion to customers but purchasein greater %uantity "uring thepromotion perio" to e3ploit the

temporary re"uction in price /or0ard


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2or*ar" uying Inventory 8ro4le

2igure 110)


63/76

2or*ar" uy

Costs to be consi"ere" = materialcost9 hol"ing cost9 an" or"er cost

6hree assumptions

1. 6he "iscount is o7ere" once9 *ith nofuture "iscounts

#. 6he retailer ta/es no action to

inuence customer "eman"&. -naly!e a perio" over *hich the

"eman" is an integer multiple of Q1


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2or*ar" uy

Optimal or"er %uantity

Qd = dD#C – d&h

+ CQ"C – d

• +etailers are often a*are of thetiming of the ne3t promotion

4orward buy =Qd –Q "

Impact of 6ra"e 8romotions


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Impact of 6ra"e 8romotionson Lot Si!es

Q B9( bottles9 C @& perbottle

d @>.1)9 D = 1#>9>>>9 h >.#

Cycle inventory at 'O Q?# B9(?# &91B#bottles

-verage o* time Q?# D B9(?# D; >.&1B#monthsQd = dD

#C – d&h

+ CQ "

C – d= )+$, ×$2))))

#-+)) – )+$,& × )+2)+ - × /-2.

-+)) – )+$,= -02-/

Impact of 6ra"e 8romotions


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Impact of 6ra"e 8romotionson Lot Si!es

Cycle inventory at 'O Qd ?# &9#&B?#

1A911 bottles-verage o* time Qd ?# D &9#&B?#>9>>>;

1.A11 months

Gith tra"e promotions

2or*ar" buy Qd = Q &9#&B = B9( &19A1# bottles

5o* Much of a 'iscount Shoul"


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5o* Much of a 'iscount Shoul"the +etailer 8ass 6hrough

8ro4ts for the retailer

Prof R &>>9>>> = B>9>>> p; p = &>>9>>> = B>9>>> p;C R

• Optimal price

p &>>9>>> F B>9>>>C R;?1#>9>>>

• 'eman" *ith no promotion

D R &>9>>> = B>9>>> p B>9>>>

• Optimal price *ith "iscount

p &>>9>>> F B>9>>> 3 #.);?1#>9>>> @&.A#)

D R &>>9>>> 0 B>9>>> p B(9)>>

• 'eman" *ith promotion


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6ra"e 8romotions

6ra"e promotions generallyincrease cycle inventory in asupply chain an" hurt performance

Counter measures

◦ E'L8 every "ay lo* pricing;

◦ 'iscount applies to items sol" to

customers sell0through; not the%uantity purchase" by the retailersell0in;

◦ Scan base" promotions

Managing Multiechelon


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Managing MultiechelonCycle Inventory

Multi0echelon supply chains havemultiple stages *ith possibly manyplayers at each stage

Lac/ of coor"ination in lot si!ing"ecisions across the supply chainresults in high costs an" more cycleinventory than re%uire"

6he goal is to "ecrease total costs bycoor"inating or"ers across the supplychain

Managing Multiechelon


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Managing MultiechelonCycle Inventory

2igure 110B


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Integer +eplenishment 8olicy

'ivi"e all parties *ithin a stage into groups suchthat all parties *ithin a group or"er from thesame supplier an" have the same reor"er interval

Set reor"er intervals across stages such that the

receipt of a replenishment or"er at any stage issynchroni!e" *ith the shipment of areplenishment or"er to at least one of itscustomers

2or customers *ith a longer reor"er interval thanthe supplier9 ma/e the customerQs reor"erinterval an integer multiple of the supplierQsinterval an" synchroni!e replenishment at thet*o stages to facilitate cross0"oc/ing


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2or customers *ith a shorter reor"er interval thanthe supplier9 ma/e the supplierQs reor"er intervalan integer multiple of the customerQs interval an"synchroni!e replenishment at the t*o stages to

facilitate cross0"oc/ing 6he relative fre%uency of reor"ering "epen"s on

the setup cost9 hol"ing cost9 an" "eman" at"i7erent parties

6hese polices ma/e the most sense for supplychains in *hich cycle inventories are large an""eman" is relatively pre"ictable


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Integer +eplenishment 8olicy2igure 110D


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2igure 110


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Summary of Learning Objectives

1. alance the appropriate costs tochoose the optimal lot si!e an" cycleinventory in a supply chain

#. $n"erstan" the impact of %uantity"iscounts on lot si!e an" cycleinventory

&. 'evise appropriate "iscounting

schemes for a supply chain(. $n"erstan" the impact of tra"e

promotions on lot si!e an" cycleinventory


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Summary of Learning Objectives

). I"entify managerial levers that re"ucelot si!e an" cycle inventory in a supplychain *ithout increasing cost

◦

+e"uce 43e" or"ering an" transportationcosts incurre" per or"er

◦ Implement volume0base" "iscountingschemes rather than in"ivi"ual lot si!e=

base" "iscounting schemes◦ Eliminate or re"uce tra"e promotions an"

encourage E'L8 = base tra"e promotions onsell0through rather than sell0in to the retailer

Managing Economies of Scale in a Supply Chain

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