Discuss the role of cycle inventory in the supply chain.


Answer:

 The primary role of cycle inventory is to allow different stages in the supply chain to purchase product in lot sizes that minimize the sum of the material. ordering. and holding cost. If a manager were considering the holding cost alone, he or she would reduce the lot size and cycle inventory. Economies of scale in purchasing and ordering. however, motivate a manager to increase the lot size and cycle inventory. A manager must make the trade-off that minimizes the total cost when making the lot sizing decision. Ideally, cycle inventory decisions should be made considering the total cost across the entire supply chain. In practice, however, each stage often makes its cycle inventory decisions independently. As we discuss later in the chapter, this practice increases the level of cycle inventory as well as the total cost in the supply chain.


Any stage of the supply chain exploits economies of scale in its replenishment decisions in the following three typical situations:


1. A fixed cost is incurred each time an order is placed or produced.


2. The supplier offers price discounts based on the quantity purchased per lot.


3. The supplier offers short-term discounts or holds trade promotions.


Cycle inventory exists in a supply chain because different stages exploit economies of scale to lower total cost. The costs considered include material cost, fixed ordering cost, and holding cost. The supply chain operation phase operates on a weekly or daily time horizon and deals with decisions concerning individual customer orders.



2. Describe the impact of trade promotions on cycle inventory.

Answer:

 Manufacturers use trade promotions to offer a discounted price and a time period over which the discount is effective. The goal of trade promotions is to influence retailers to act in a way that helps the manufacturer achieve its objectives. A few of the hey goals (from the manufacturer's perspective) of a trade promotion are as follows:


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 a trade promotion, the retailer has the following options: 

1. Pass through some or all of the promotion to customers to spur sales.

Pass through very little of the promotion to toner purchase in rudest

The first action lower the price of the product for the end user, leading to increased purchases and thus increased sales for the entire supply chain. The second action does not increase purchases by the customer but increases the amount of inventory held at the retailer. As a result, the cycle inventory and low time within the supply chain increase


Trade promotions lead to a significant increase in lot size and cycle inventory because of forward buying by the retailer. This generally results in reduced supply chain profits unless the trade promotion reduces demand fluctuations


The retailer can justify the forward buying because it decreases his total cost. In contrast, the manufacturer can justify this action only if they have cither inadvertently built up a lot of excess inventory of the forward buy allows the manufacturer to smooth demand by shilling it from peak to low-demand periods. In practice, manufacturers often build up inventory in anticipation of planned promotions. During the trade promotion, this inventory shifts to the retailer, primarily as a forward buy. If the forward buy during trade promotions is a significant fraction of total sales. manufacturers end up reducing the revenues they earn from sales because most of the product is sold at a discount. The increase in inventory and the decrease in revenues often leads to a reduction in manufacturer profits as a result of trade promotions. Total supply chain profits also decrease because of an increase in inventory.


3. Discuss the characteristics of a successful multi-echelon supply chain.


Answer: For such a multi-echelon distribution supply chain, a good replenishment policy has the following characteristics:


• All parties within a stage are divided into groups such that all parties within a group order simultaneously from the same supplier.


• When a party receives a replenishment order, the receipt should be synchronized with the shipment of a  replenistiment order to at least one of its customers. In other words, a portion of any replenishment order at a stage should be cross-docked onto the next stage.


• If a customer replenishes less frequently than its supplier, the supplier replenishment frequency should be an integer multiple of the customer replenishment frequency and replenishment at both stages should be synchronized to facilitate cross-docking. In other words, a supplier should cross-dock all orders from customers who reorder less frequently than the supplier himself


• Il a customer replenishes more frequently than its supplier, the customer's replenishment frequency should be an integer multiple of the supplier's replenishment frequency and replenishment at both stages should be synchronized to facilitate cross-docking. In other words, a supplier should cross-dock one out of every k shipments to a customer who orders more frequently than himself, where k is an integer.


The relative frequency of reordering will depend upon the setup cost, holding cost, and demand at different parties.


Replenishment orders in multi-echelon supply chains should be synchronized


to keep cycle inventory and order costs low. In general, each stage should attempt to coordinate orders from customers who order less frequently and cross-dock all such orders. Some of the orders from customers that order more frequently should also be cross-docked. Difficulty: Moderate The XYZ Company has an assembly plant in Cincinnati and its parts plant in Indianapolis. Parts are transported from Indianapolis to Cincinnati using trucks. Each shipment costs $100. The Cincinnati plant assembles and sells 300 finished products each day and operates 50 weeks a year. Part #456 costs $50 and XYZ Company incurs a holding cost of 20 percent per year. How many of part #456 should XYZ Company put in each shipment? What is the cycle inventory of part #456 at XYZ Company?


Answer:


Q* = V2DS/h C 

       (2(300 x 50 x 5)$100)/(.2 x $50) 

       = 1224.745 = 1225

       Average cycle inventory = Q*/2 

                                        = 1225/2

                                        = 612.5