11Managing Economies of Scale in a Supply Chain Cycle Invento

11
Managing Economies of Scale in a Supply Chain: Cycle
Inventory
PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
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Copyright ©2013 Pearson Education, Inc. publishing as Prentice
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Copyright ©2013 Pearson Education, Inc. publishing as Prenti ce
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Learning Objectives
Balance the appropriate costs to choose the optimal lot size and

cycle inventory in a supply chain.
Understand the impact of quantity discounts on lot size and
cycle inventory.
Devise appropriate discounting schemes for a supply chain.
Understand the impact of trade promotions on lot size and cycle
inventory.
Identify managerial levers that reduce lot size and cycle
inventory in a supply chain without increasing cost.
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Role of Cycle Inventory
in a Supply Chain
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
Q: Quantity in a lot or batch size
D: Demand per unit time
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When is the right time to produce or purchase
Higher inventory can cause higher cost.
Are we organizing the FIFO or LIFO

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Inventory Profile
Figure 11-1
Re-order point e.g. 3days
Inventory on Hand
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Say the top is 100 and the bottom is 0
Say it take 10 days to get rid of inventory. So this would be the
cycle profile
https://www.youtube.com/watch?v=WtMHXu-voeQ
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in a Supply Chain
Average flow time resulting from cycle inventory
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This calculation will determine when to make an order.
E.g. Avg. Flow time re from cyctle inve: 5 days.
You know this is when you should purchace.
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in a Supply Chain
Lower cycle inventory has
Shorter average flow time
Lower working capital requirements
Lower inventory holding costs
Cycle inventory is held to
Take advantage of economies of scale
Reduce costs in the supply chain
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in a Supply Chain
Average price paid per unit purchased is a key cost in the lot-

sizing decision
Material cost = C
Fixed ordering cost includes all costs that do not vary with the
size of the order but are incurred each time an order is placed
Fixed ordering cost = S
Holding cost is the cost of carrying one unit in inventory for a
specified period of time
Holding cost = H = hC
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in a Supply Chain
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
In practice, each stage generally makes its own supply chain
decisions
Increases total cycle inventory and total costs in the supply
chain
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in a Supply Chain
Economies of scale exploited in three typical situations
A fixed cost is incurred each time an order is placed or
produced
The supplier offers price discounts based on the quantity
purchased per lot
The supplier offers short-term price discounts or holds trade
promotions
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Estimating Cycle Inventory Related Costs in Practice
Inventory Holding Cost
Cost of capital
where
E = amount of equity
D = amount of debt
Rf = risk-free rate of return
b = the firm’s beta
MRP = market risk premium
Rb = rate at which the firm can borrow money
t = tax rate
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Cost of capital
Adjusted for pre-tax setting
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Obsolescence cost
Handling cost
Occupancy cost
Miscellaneous costs
Theft, security, damage, tax, insurance
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Ordering Cost
Buyer time
Transportation costs
Receiving costs
Other costs

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Economies of Scale
to Exploit Fixed Costs
Lot sizing for a single product (EOQ)
D = Annual demand of the product
S = Fixed cost incurred per order
C = Cost per unit
H = Holding cost per year as a fraction of product
cost
Basic assumptions
Demand is steady at D units per unit time
No shortages are allowed
Replenishment lead time is fixed
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D- Assumption 1000 pairs of jeans are steady.
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Economies of Scale

to Exploit Fixed Costs
Minimize
Annual material cost
Annual ordering cost
Annual holding cost
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Lot Sizing for a Single Product
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Figure 11-2

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Holding cost and ordering cost = total cost
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The economic order quantity (EOQ)
The optimal ordering frequency
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EOQ Example
Annual demand, D = 1,000 x 12 = 12,000 units
Order cost per lot, S = $4,000
Unit cost per computer, C = $500
Holding cost per year as a fraction of unit cost, h = 0.2
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Notes:
EOQ Example
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Notes:
EOQ Example
Lot size reduced to Q = 200 units
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Notes:
Lot Size and Ordering Cost
If the lot size Q* = 200, how much should the ordering cost be
reduced?
Desired lot size, Q* = 200
Annual demand, D = 1,000 × 12 = 12,000 units
Unit cost per computer, C = $500
Holding cost per year as a fraction of inventory value, h = 0.2
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Production Lot Sizing
The entire lot does not arrive at the same time
Production occurs at a specified rate P
Inventory builds up at a rate of P – D
Annual setup cost

Annual holding cost
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Aggregating Multiple Products
in a Single Order
Savings in transportation costs
Reduces fixed cost for each product
Lot size for each product can be reduced
Cycle inventory is reduced
Single delivery from multiple suppliers or single truck
delivering to multiple retailers
Receiving and loading costs reduced
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Lot Sizing with Multiple
Products or Customers
Ordering, transportation, and receiving costs grow with the
variety of products or pickup points
Lot sizes and ordering policy that minimize total cost
Di: Annual demand for product i
S: Order cost incurred each time an order is placed,
independent of the variety of products in the order
si: Additional order cost incurred if product i is included
in the order

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Lot Sizing with Multiple
Products or Customers
Three approaches
Each product manager orders his or her model independently
The product managers jointly order every product in each lot
Product managers order jointly but not every order contains
every product; that is, each lot contains a selected subset of the
products
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Multiple Products Ordered and Delivered Independently
Demand
DL = 12,000/yr, DM = 1,200/yr, DH = 120/yr
Common order cost
S = $4,000
Product-specific order cost
sL = $1,000, sM = $1,000, sH = $1,000
Holding cost
h = 0.2
Unit cost
CL = $500, CM = $500, CH = $500

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Notes:
Multiple Products Ordered and Delivered
IndependentlyLiteproMedproHeavyproDemand per
year12,0001,200120Fixed cost/order$5,000
$5,000$5,000Optimal order size1,095346110Cycle
inventory54817355Annual holding
cost$54,772$17,321$5,477Order
frequency11.0/year3.5/year1.1/yearAnnual ordering
cost$54,772$17,321$5,477Average flow time2.4 weeks7.5
weeks23.7 weeksAnnual cost$109,544$34,642$10,954
Table 11-1
Total annual cost = $155,140
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Notes:
Lots Ordered and Delivered Jointly

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Products Ordered and Delivered Jointly
Annual order cost = 9.75 x 7,000 = $68,250
Annual ordering
and holding cost = $61,512 + $6,151 + $615 + $68,250
= $136,528
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Products Ordered and Delivered
JointlyLiteproMedproHeavyproDemand per year

(D)12,0001,200120Order frequency
(n∗ )9.75/year9.75/year9.75/yearOptimal order size
(D/n∗ )1,23012312.3Cycle inventory61561.56.15Annual holding
cost$61,512$6,151$615Average flow time2.67 weeks2.67
weeks2.67 weeks
Table 11-2
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Aggregation with Capacity Constraint
W.W. Grainger example
Demand per product, Di = 10,000
Holding cost, h = 0.2
Unit cost per product, Ci = $50
Common order cost, S = $500
Supplier-specific order cost, si = $100
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Notes:

Annual holding cost per supplier
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Notes:
Total required capacity per truck = 4 x 671 = 2,684 units
Truck capacity = 2,500 units
Order quantity from each supplier = 2,500/4 = 625
Order frequency increased to 10,000/625 = 16
Annual order cost per supplier increases to $3,600
Annual holding cost per supplier decreases to $3,125.
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Notes:
Lots Ordered and Delivered Jointly for a Selected Subset

Step 1: Identify the most frequently ordered product
assuming each product is ordered independently
Step 2: For all products i ≠ i*, evaluate the ordering
frequency
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Step 3: For all i ≠ i*, evaluate the frequency of product i
relative to the most frequently ordered product i* to be mi
Step 4: Recalculate the ordering frequency of the most
frequently ordered product i* to be n
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Step 5: Evaluate an order frequency of ni = n/mi and the total
cost of such an ordering policy

Tailored aggregation – higher-demand products ordered more
frequently and lower-demand products ordered less frequently
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Ordered and Delivered Jointly – Frequency Varies by Order
Applying Step 1
Thus
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Applying Step 2
Applying Step 3

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Ordered and Delivered Jointly – Frequency Varies by
OrderLiteproMedproHeavyproDemand per year
(D)12,0001,200120Order frequency
(n∗ )11.47/year5.74/year2.29/yearOptimal order size
(D/n∗ )1,04620952Cycle inventory523104.526Annual holding
cost$52,307$10,461$2,615Average flow time2.27 weeks4.53
weeks11.35 weeks
Table 11-3
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Applying Step 4
Applying Step 5

Annual order cost Total annual cost
$130,767
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Economies of Scale to
Exploit Quantity Discounts
Lot size-based discount – discounts based on quantity ordered
in a single lot
Volume based discount – discount is based on total quantity
purchased over a given period
Two common schemes
All-unit quantity discounts
Marginal unit quantity discount or multi-block tariffs
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Quantity Discounts
Two basic questions
What is the optimal purchasing decision for a buyer seeking to
maximize profits? How does this decision affect the supply
chain in terms of lot sizes, cycle inventories, and flow times?
Under what conditions should a supplier offer quantity

discounts? What are appropriate pricing schedules that a
supplier seeking to maximize profits should offer?
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All-Unit Quantity Discounts
Pricing schedule has specified quantity break points q0, q1, …,
qr, where q0 = 0
If an order is placed that is at least as large as qi but smaller
than qi+1, then each unit has an average unit cost of Ci
Unit cost generally decreases as the quantity increases, i.e., C0
> C1 > … > Cr
Objective is to decide on a lot size that will minimize the sum
of material, order, and holding costs
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Figure 11-3
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Step 1: Evaluate the optimal lot size for each price Ci,0 ≤ i ≤
r as follows
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Step 2: We next select the order quantity Q*i for each price
Ci
1.
2.
3.
Case 3 can be ignored as it is considered for Qi+1
For Case 1 if , then set Q*i = Qi
If , then a discount is not possible
Set Q*i = qi to qualify for the discounted price of Ci

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Step 3: Calculate the total annual cost of ordering Q*i units
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Step 4: Select Q*i with the lowest total cost TCi
Cutoff price
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All-Unit Quantity Discount ExampleOrder QuantityUnit Price0–
4,999$3.005,000–9,999$2.9610,000 or more$2.92
q0 = 0, q1 = 5,000, q2 = 10,000
C0 = $3.00, C1 = $2.96, C2 = $2.92

D = 120,000/year, S = $100/lot, h = 0.2
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All-Unit Quantity Discount Example
Step 1
Step 2
Ignore i = 0 because Q0 = 6,324 > q1 = 5,000
For i = 1, 2
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All-Unit Quantity Discount Example
Step 3
Lowest total cost is for i = 2
Order bottles per lot at $2.92 per bottle
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Marginal Unit Quantity Discounts
Multi-block tariffs – the marginal cost of a unit that decreases
at a breakpoint
For each value of i, 0 ≤ i ≤ r, let Vi be the cost of ordering qi
units
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Figure 11-4
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Material cost of each order Q is Vi + (Q – qi)Ci

Total annual cost
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Step 1: Evaluate the optimal lot size for each price Ci
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Step 2: Select the order quantity Qi* for each price Ci

1.
2.
3.
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Step 3: Calculate the total annual cost of ordering Qi*
Step 4: Select the order size Qi* with the lowest total cost
TCi
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Marginal Unit Quantity Discount Example
Original data now a marginal discount Order QuantityUnit
Price0–4,999$3.005,000–9,999$2.9610,000 or more$2.92
q0 = 0, q1 = 5,000, q2 = 10,000
C0 = $3.00, C1 = $2.96, C2 = $2.92
D = 120,000/year, S = $100/lot, h = 0.2
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Step 1
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Step 2
Step 3
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Why Quantity Discounts?
Quantity discounts can increase the supply chain surplus for the
following two main reasons
Improved coordination to increase total supply chain profits
Extraction of surplus through price discrimination
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Notes:
Quantity Discounts for Commodity Products
D = 120,000 bottles/year, SR = $100, hR = 0.2, CR = $3
SM = $250, hM = 0.2, CM = $2
Annual supply chain cost (manufacturer + DO)
= $6,009 + $3,795 = $9,804
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Notes:
Locally Optimal Lot Sizes
Annual cost for DO and manufacturer
Annual supply chain cost (manufacturer + DO)
= $5,106 + $4,059 = $9,165
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Notes:
Designing a Suitable Lot Size-Based Quantity Discount
Design a suitable quantity discount that gets DO to order in lots
of 9,165 units when its aims to minimize only its own total
costs
Manufacturer needs to offer an incentive of at least $264 per

year to DO in terms of decreased material cost if DO orders in
lots of 9,165 units
Appropriate quantity discount is $3 if DO orders in lots smaller
than 9,165 units and $2.9978 for orders of 9,165 or more
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Notes:
Quantity Discounts When
Firm Has Market Power
Demand curve = 360,000 – 60,000p
Production cost = CM = $2 per bottle
p to maximize ProfR
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Notes:
Quantity Discounts When
Firm Has Market Power
CR = $4 per bottle, p = $5 per bottle
Total market demand = 360,000 – 60,000p = 60,000
ProfR = (5 – 4)(360,000 – 60,000 × 5) = $60,000
ProfM = (4 – 2)(360,000 – 60,000 × 5) = $120,000
ProfSC = (p – CM)(360,000 – 60,000p)
Coordinated retail price
ProfSC = ($4 – $2) x 120,000 = $240,000
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Notes:
Two-Part Tariff
Manufacturer charges its entire profit as an up-front franchise
fee ff
Sells to the retailer at cost
Retail pricing decision is based on maximizing its profits
Effectively maximizes the coordinated supply chain profit
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Notes:
Volume-Based Quantity Discounts
Design a volume-based discount scheme that gets the retailer to
purchase and sell the quantity sold when the two stages
coordinate their actions
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Notes:
Lessons from Discounting Schemes
Quantity discounts play a role in supply chain coordination and
improved supply chain profits
Discount schemes that are optimal are volume based and not lot
size based unless the manufacturer has large fixed costs
associated with each lot
Even in the presence of large fixed costs for the manufacturer, a
two-part tariff or volume-based discount, with the manufacturer
passing on some of the fixed cost to the retailer, optimally
coordinates the supply chain and maximizes profits
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Lessons from Discounting Schemes
Lot size–based discounts tend to raise the cycle inventory in the
supply chain
Volume-based discounts are compatible with small lots that
reduce cycle inventory
Retailers will tend to increase the size of the lot toward the end
of the evaluation period, the hockey stick phenomenon
With multiple retailers with different demand curves optimal
discount continues to be volume based with the average price
charged to the retailers decreasing as the rate of purchase
increases
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Price Discrimination to Maximize Supplier Profits
Firm charges differential prices to maximize profits
Setting a fixed price for all units does not maximize profits for
the manufacturer
Manufacturer can obtain maximum profits by pricing each unit
differently based on customers’ marginal evaluation at each
quantity
Quantity discounts are one mechanism for price discrimination
because customers pay different prices based on the quantity
purchased
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Short-Term Discounting:
Trade Promotions
Trade promotions are price discounts for a limited period of
time
Key goals
Induce retailers to use price discounts, displays, or advertising
to spur sales
Shift inventory from the manufacturer to the retailer and the
customer
Defend a brand against competition
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Short-Term Discounting:
Trade Promotions
Impact on the behavior of the retailer and supply chain
performance
Retailer has two primary options
Pass through some or all of the promotion 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 (forward buy)
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Forward Buying Inventory Profile
Figure 11-5
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Forward Buy
Costs to be considered – material cost, holding cost, and order
cost
Three assumptions
The discount is offered once, with no future discounts
The retailer takes no action to influence customer demand
Analyze a period over which the demand is an integer multiple
of Q*
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Forward Buy
Optimal order quantity
Retailers are often aware of the timing of the next promotion

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Impact of Trade Promotions
on Lot Sizes
Q* = 6,324 bottles, C = $3 per bottle
d = $0.15, D = 120,000, h = 0.2
Cycle inventory at DO = Q*/2 = 6,324/2 = 3,162 bottles
Average flow time = Q*/2D = 6,324/(2D) = 0.3162
months
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Notes:
Optimal order quantity =
Impact of Trade Promotions

on Lot Sizes
Cycle inventory at DO = Qd/2 = 38,236/2 = 19,118
bottles
Average flow time = Qd/2D = 38,236/(20,000)
= 1.9118 months
With trade promotions
Forward buy = Qd – Q* = 38,236 – 6,324 = 31,912 bottles
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Notes:
Optimal order quantity =
How Much of a Discount Should the Retailer Pass Through?
Profits for the retailer
ProfR = (300,000 – 60,000p)p – (300,000 – 60,000p)CR
Optimal price
p = (300,000 + 60,000CR)/120,000
Demand with no promotion
DR = 30,000 – 60,000p = 60,000
Optimal price with discount
p = (300,000 + 60,000 x 2.85)/120,000 = $3.925
DR = 300,000 - 60,000p = 64,500
Demand with promotion
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Trade Promotions
Trade promotions generally increase cycle inventory in a supply
chain and hurt performance
Counter measures
EDLP (every day low pricing)
Discount applies to items sold to customers (sell-through) not
the quantity purchased by the retailer (sell-in)
Scan based promotions
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Notes:
Managing Multiechelon
Cycle Inventory
Multi-echelon supply chains have multiple stages with possibly
many players at each stage
Lack of coordination in lot sizing decisions across the supply
chain results in high costs and more cycle inventory than
required
The goal is to decrease total costs by coordinating orders across
the supply chain
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Managing Multiechelon
Cycle Inventory
Figure 11-6
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Integer Replenishment Policy
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 of its
customers
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
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For customers with a shorter reorder interval than the supplier,
make the supplier’s reorder interval an integer multiple of the
customer’s interval and synchronize replenishment at the two
stages to facilitate cross-docking
The relative frequency of reordering depends on the setup cost,
holding cost, and demand at different parties
These polices make the most sense for supply chains in which
cycle inventories are large and demand is relatively predictable
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Figure 11-7
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Figure 11-8
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Summary of Learning Objectives
Balance the appropriate costs to choose the optimal lot size and
cycle inventory in a supply chain
Understand the impact of quantity discounts on lot size and
cycle inventory
Devise appropriate discounting schemes for a supply chain
Understand the impact of trade promotions on lot size and cycle
inventory
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Hall.
Identify managerial levers that reduce lot size and cycle
inventory in a supply chain without increasing cost
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
11-‹#›
Hall.
11-‹#›

Hall.
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher.
Printed in the United States of America.
11-‹#›
Hall.
11-‹#›
Hall.
Cycle inventory =
lot size
2
=
Q
2
Cycle inventory=
lot size
2
=
Q
2
Average flow time =
average inventory

average flow rate
Average flow time =
average inventory
average flow rate
=
cycle inventory
demand
=
Q
2D
=
cycle inventory
demand
=
Q
2D
WACC =
E
D+ E
(Rf + β ×MRP)+
D
D+ E
Rb(1– t)
WACC=

E
D+E
(R
f
+b´MRP)+
D
D+E
R
b
(1–t)
Pretax WACC = after-tax WACC / (1– t)
Pretax WACC=after-tax WACC/(1–t)
Annual material cost =CD
Annual material cost=CD
Number of orders per year =
D
Q
Number of orders per year=
D
Q
Annual ordering cost =
D
Q
⎛

⎝
⎜
⎞
⎠
⎟
Annual ordering cost=
D
Q
æ
è
ç
ö
ø
÷
S
Annual holding cost =
Q
2
⎛
⎝
⎜
⎞
⎠
⎟
Q
2

⎛
⎝
⎜
⎞
⎠
⎟
Annual holding cost=
Q
2
æ
è
ç
ö
ø
÷
H=
Q
2
æ
è
ç
ö
ø
÷
hC
Total annual cost, TC =CD+
D
Q
⎛

⎝
⎜
⎞
⎠
⎟
Q
2
⎛
⎝
⎜
⎞
⎠
⎟
Total annual cost, TC=CD+
D
Q
æ
è
ç
ö
ø
÷
S+
Q
2
æ
è

ç
ö
ø
÷
hC
Chapter 11 • Managing Economies of Scale in a Supply Chain:
Cycle Inventory 277
The purchasing manager makes the lot-sizing decision to
minimize the total cost the store
incurs. He or she must consider three costs when deciding on
the lot size:
• Annual material cost
• Annual ordering cost
• Annual holding cost
Because purchase price is independent of lot size, we have
The number of orders must suffice to meet the annual demand
D. Given a lot size of Q, we
thus have
(11.3)
Because an order cost of S is incurred for each order placed, we
infer that
(11.4)
Given a lot size of Q, we have an average inventory of Q/2. The
annual holding cost is thus the
cost of holding Q/2 units in inventory for one year and is given
as

The total annual cost, TC, is the sum of all three costs and is
given as
Figure 11-2 shows the variation in different costs as the lot size
is changed. Observe that
the annual holding cost increases with an increase in lot size. In
contrast, the annual ordering cost
declines with an increase in lot size. The material cost is
independent of lot size because we have
assumed the price to be fixed. The total annual cost thus first
declines and then increases with an
increase in lot size.
From the perspective of the manager at Best Buy, the optimal
lot size is one that minimizes
the total cost to Best Buy. It is obtained by taking the first
derivative of the total cost with respect
to Q and setting it equal to 0 (see Appendix 11A at the end of
this chapter). The optimal lot size
Total annual cost, TC = CD + aD
Q
bS + aQ
2
bhC
Annual holding cost = aQ
2
bH = aQ
2
bhC
Annual ordering cost = aD

Q
bS
D
Q
Annual material cost = CD
Cost
Total Cost
Holding
Cost
Ordering Cost
Material
Cost
Lot Size
FIGURE 11-2 Effect of Lot Size on Costs at Best Buy
M11_CHOP3952_05_SE_C11.QXD 11/15/11 7:39 PM Page
277
Optimal lot size, Q* =
2DS
hC
Optimal lot size, Q*=
2DS
hC

n* =
D
Q *
=
DhC
2S
n*=
D
Q*
=
DhC
2S
Optimal order size = Q* =
2 ×12,000 × 4,000
0.2 × 500
= 980
Optimal order size=Q*=
2´12,000´4,000
0.2´500
=980
Cycle inventory =
Q *
2
=
980

2
= 490
Cycle inventory=
Q*
2
=
980
2
=490
D
Q *
= 12.24
Number of orders per year=
D
Q*
=12.24
Annual ordering and holding cost =
D
Q *
S +
Q *
2
⎛
⎝

⎜
⎞
⎠
⎟ C = 97,980
Annual ordering and holding cost=
D
Q*
S+
Q*
2
æ
è
ç
ö
ø
÷
hC=97,980
Average flow time =
Q *
2D
=
490
12,000
= 0.041= 0.49 month
Average flow time=
Q*
2D
=

490
12,000
=0.041=0.49 month
Annual inventory-related costs =
D
Q *
S +
Q *
2
⎛
⎝
⎜
⎞
⎠
⎟
Annual inventory-related costs=
D
Q*
S+
Q*
2
æ
è
ç
ö
ø
÷
hC=250,000

S =
hC(Q*)2
2D
=
0.2×500×2002
2×12,000
=166.7
S=
hC(Q*)
2
2D
=
0.2´500´200
2
2´12,000
=166.7
QP =
2DS
(1– D / P)hC
Q
P
=
2DS
(1–D/P)hC
D

QP
⎛
⎝
⎜
⎞
⎠
⎟
D
Q
P
æ
è
ç
ö
ø
÷
S
(1– D / P)
QP
2
⎛
⎝
⎜
⎞
⎠

⎟
(1–D/P)
Q
P
2
æ
è
ç
ö
ø
÷
hC
Annual holding cost =
DLhCL
2n
+
DMhCM
2n
+
DHhCH
2n
Annual holding cost=
D
L
hC
L
2n
+
D

M
hC
M
2n
+
D
H
hC
H
2n
S* = S + sL + sM + sH
S*=S+s
L
+s
M
+s
H
Annual order cost = S * n
Annual order cost=S*n
Total annual cost =
DLhCL
2n
+
DMhCM
2n
+

DHhCH
2n
+S * n
Total annual cost=
D
L
hC
L
2n
+
D
M
hC
M
2n
+
D
H
hC
H
2n
+S*n
n* =
DLhCL + DMhCM + DHhCH
2S *
n*=
D
L
hC
L

+D
M
hC
M
+D
H
hC
H
2S*
n* =
DihCii=1
k
∑
2S *
n*=
D
i
hC
i
i=1
k
å
2S*
S* = S + sA + sB + sC = $7,000 per order
S*=S+s
A
+s
B
+s

C
=$7,000 per order
n* =
12,000×100+1,200×100+120×100
2×7,000
= 9.75
n*=
12,000´100+1,200´100+120´100
2´7,000
=9.75
S* = S + s1 + s2 + s3 + s4 = $900 per order
S*=S+s
1
+s
2
+s
3
+s
4
=$900 per order
n* =
D1hC1i=1
4
∑
2S *

=
4×10,000×0.2×50
2×900
=14.91
n*=
D
1
hC
1
i=1
4
å
2S*
=
4´10,000´0.2´50
2´900
=14.91
Annual order cost = 14.91×
900
4
= $3,354
Annual order cost=14.91´
900
4
=$3,354
=
hCiQ
2

= 0.2×50×
671
2
= $3,355
=
hC
i
Q
2
=0.2´50´
671
2
=$3,355
ni =
hCiDi
2(S + si)
n
i
=
hC
i
D
i
2(S+s
i
)
ni =
hCiDi

2si
n
i
=
hC
i
D
i
2s
i
mi = n /ni
⎡
⎢ ⎢
⎤
⎥ ⎥
m
i
=n/n
i
é
ê
ê
ù
ú
ú
n =
hCimiDi=1
l

∑
2 S + si /mii=1
l
∑( )
n=
hC
i
m
i
D
i=1
l
å
2S+s
i
/m
i
i=1
l
å
( )
TC = nS + nisi
i=1
l
∑ +
Di
2ni
⎛

⎝
⎜
⎞
⎠
⎟
i−1
l
∑
TC=nS+n
i
s
i
i=1
l
å
+
D
i
2n
i
æ
è
ç
ö
ø
÷
hC
1
i-1

l
å
nL =
hCLDL
2(S + sL)
=11.0
n
L
=
hC
L
D
L
2(S+s
L
)
=11.0
nM =
hCMDM
2(S + sM )
= 3.5
n
M
=
hC
M
D
M

2(S+s
M
)
=3.5
nL =
hCHDH
2(S + sH)
=1.1
n
L
=
hC
H
D
H
2(S+s
H
)
=1.1
n =11.0
n=11.0
nM =
hCMDM
2sM
= 7.7 and nH =

hCHDH
2sH
= 2.4
n
M
=
hC
M
D
M
2s
M
=7.7 and n
H
=
hC
H
D
H
2s
H
=2.4
mM =
n
nM
⎡
⎢
⎢

⎢
⎤
⎥
⎥
⎥
=
11.0
7.7
⎡
⎢
⎢
⎤
⎥
⎥
n
nH
⎡
⎢
⎢
⎢
⎤

⎥
⎥
⎥
=
11.0
2.4
⎡
⎢
⎢
⎤
⎥
⎥
m
M
=
n
n
M
é
ê
ê
ê
ù
ú
ú
ú
=
11.0
7.7

é
ê
ê
ù
ú
ú
=2 and m
H
=
n
n
H
é
ê
ê
ê
ù
ú
ú
ú
=
11.0
2.4
é
ê
ê
ù
ú
ú
=5
n =11.47
n=11.47

nL =11.47/ yr
n
L
=11.47/yr
nM =11.47/2= 5.74/ yr
n
M
=11.47/2=5.74/yr
nH =11.47/5 = 2.29/ yr
n
H
=11.47/5=2.29/yr
nS +nLsL +nMsM +nHsH = $65,383.5
nS+n
L
s
L
+n
M
s
M
+n
H
s
H

=$65,383.5
Qi =
2DS
hCi
Q
i
=
2DS
hC
i
qi ≤ Qi < qi+1
q
i
£Q
i
<q
i+1
Qi < qi
Q
i
<q
i
Qi ≥ qi+1
Q

i
³q
i+1
Total annual cost, TCi =
D
Qi
*
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
Qi
*
2
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟

Total annual cost, TC
i
=
D
Q
i
*
æ
è
ç
ç
ö
ø
÷
÷
S+
Q
i
*
2
æ
è
ç
ç
ö
ø
÷
÷
hC
i
+DC
i
C* =
1

D
DCr +
DS
qr
+
h
2
qrCr – 2hDSCr
⎛
⎝
⎜
⎞
⎠
⎟
C*=
1
D
DC
r
+
DS
q
r
+
h
2
q
r
C

r
–2hDSC
r
æ
è
ç
ö
ø
÷
Q0 =
2DS
hC0
= 6,324; Q1 =
2DS
hC1
= 6,367; Q2 =
2DS
hC2
= 6,410
Q
0
=
2DS
hC
0
=6,324; Q
1
=
2DS
hC

1
=6,367; Q
2
=
2DS
hC
2
=6,410
Q1
* = Q1 = 6,367; Q2
* = q2 = 10,000
Q
1
*
=Q
1
=6,367; Q
2
*
=q
2
=10,000
TC1 =
D
Q1
*
⎛

⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
Q1
*
2
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
TC
1
=
D
Q
1
*
æ
è
ç
ç
ö
ø

÷
÷
S+
Q
1
*
2
æ
è
ç
ç
ö
ø
÷
÷
hC
1
+DC
1
=$358,969; TC
2
=$354,520
Q2
* =10,000
Q
2
*
=10,000
Vi =C0(q1 –q0)+C1(q2 –q1)+...+Ci–1(qi –qi–1)
V

i
=C
0
(q
1
–q
0
)+C
1
(q
2
–q
1
)+...+C
i–1
(q
i
–q
i–1
)
Annual order cost =
D
Q
⎛
⎝
⎜
⎞
⎠
⎟
Annual order cost=

D
Q
æ
è
ç
ö
ø
÷
S
Annual holding cost = Vi + (Q – qi)Ci⎡ ⎣ ⎤ ⎦
Annual holding cost=V
i
+(Q–q
i
)C
i
é
ë
ù
û
h/2
Annual materials cost =
D
Q
Vi + (Q – qi)Ci⎡ ⎣ ⎤ ⎦
Annual materials cost=
D
Q
V
i

+(Q–q
i
)C
i
é
ë
ù
û
=
D
Q
⎛
⎝
⎜
⎞
⎠
⎟ –qi)Ci⎡ ⎣ ⎤ ⎦
=
D
Q
æ
è
ç
ö
ø
÷
S+V
i
+(Q–q
i

)C
i
é
ë
ù
û
h/2
+
D
Q
Vi +(Q –qi)Ci⎡ ⎣ ⎤ ⎦
+
D
Q
V
i
+(Q–q
i
)C
i
é
ë
ù
û
Optimal lot size for Ci is Qi =
2D(S +Vi – qiCi)
hCi
Optimal lot size for C
i

is Q
i
=
2D(S+V
i
–q
i
C
i
)
hC
i
If qi ≤ Qi ≤ qi+1 then set Qi
* = Qi
If q
i
£Q
i
£q
i+1
then set Q
i
*
=Q
i
If Qi < qi then set Qi
* = qi
If Q
i
<q

i
then set Q
i
*
=q
i
If Qi > qi+1 then set Qi
* = qi+1
If Q
i
>q
i+1
then set Q
i
*
=q
i+1
TCi =
D
Qi
*
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟

* –qi)Ci
⎡
⎣
⎤
⎦
D
Qi
*
Vi +(Qi
* –qi)Ci
⎡
⎣
⎤
⎦
TC
i
=
D
Q
i
*
æ
è
ç
ç
ö
ø
÷
÷
S+V

i
+(Q
i
*
–q
i
)C
i
é
ë
ù
û
h/2+
D
Q
i
*
V
i
+(Q
i
*
–q
i
)C
i
é
ë
ù
û
V0 = 0; V1 = 3(5,000 – 0) = $15,000
V2 = 3(5,000 – 0) + 2.96(10,000 – 5,000) = $29,800
V

0
=0; V
1
=3(5,000–0)=$15,000
V
2
=3(5,000–0)+2.96(10,000–5,000)=$29,800
Q0 =
2D(S +V0 –q0C0)
hC0
= 6,324
Q
0
=
2D(S+V
0
–q
0
C
0
)
hC
0
=6,324
Q1 =
2D(S +V1 –q1C1)
hC1
=11,028

Q
1
=
2D(S+V
1
–q
1
C
1
)
hC
1
=11,028
Q2 =
2D(S +V2 –q2C2)
hC2
=16,961
Q
2
=
2D(S+V
2
–q
2
C
2
)
hC
2
=16,961

Q0
* = q1 = 5,000 because Q0 = 6,324 > 5,000
Q1
* = q2 = 10,000; Q2 = Q2 = 16,961
Q
0
*
=q
1
=5,000 because Q
0
=6,324>5,000
Q
1
*
=q
2
=10,000; Q
2
=Q
2
=16,961
TC0 =
D
Q0
*
⎛
⎝
⎜ ⎜

⎞
⎠
⎟ ⎟
* –q0)C 0
⎡
⎣
⎤
⎦
D
Q0
*
V0 +(Q0
* –q0)C0
⎡
⎣
⎤
⎦
TC
0
=
D
Q
0
*
æ
è
ç
ç
ö

ø
÷
÷
S+V
0
+(Q
0
*
–q
0
)C
0
é
ë
ù
û
h/2+
D
Q
0
*
V
0
+(Q
0
*
–q
0
)C
0
é
ë
ù
û
=$363,900

TC2 =
D
Q2
*
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
* –q2)C 2
⎡
⎣
⎤
⎦
D
Q2
*
V2 +(Q2
* –q2)C2
⎡
⎣
⎤
⎦
TC

2
=
D
Q
2
*
æ
è
ç
ç
ö
ø
÷
÷
S+V
2
+(Q
2
*
–q
2
)C
2
é
ë
ù
û
h/2+
D
Q
2
*
V
2
+(Q
2

*
–q
2
)C
2
é
ë
ù
û
=$360,365
TC1 =
D
Q1
*
⎛
⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
* –q1)C1
⎡
⎣
⎤
⎦
D
Q1

*
V1 +(Q1
* –q1)C1
⎡
⎣
⎤
⎦
TC
1
=
D
Q
1
*
æ
è
ç
ç
ö
ø
÷
÷
S+V
1
+(Q
1
*
–q
1
)C
1
é
ë

ù
û
h/2+
D
Q
1
*
V
1
+(Q
1
*
–q
1
)C
1
é
ë
ù
û
=$361,780
QR =
2DSR
hRCR
=
2×120,000×100
0.2×3
= 6,324
Q
R
=

2DS
R
h
R
C
R
=
2´120,000´100
0.2´3
=6,324
Annual cost for DO =
D
QR
⎛
⎝
⎜
⎞
⎠
⎟
QR
2
⎛
⎝
⎜
⎞

⎠
⎟
Annual cost for DO=
D
Q
R
æ
è
ç
ö
ø
÷
S
R
+
Q
R
2
æ
è
ç
ö
ø
÷
h
R
C
R
=$3,795
Annual cost for manufacturer =
D
QR

⎛
⎝
⎜
⎞
⎠
⎟
QR
2
⎛
⎝
⎜
⎞
⎠
⎟
Annual cost for manufacturer=
D
Q
R
æ
è
ç
ö
ø
÷
S
M
+

Q
R
2
æ
è
ç
ö
ø
÷
h
M
C
M
=$6,009
=
D
Q
⎛
⎝
⎜
⎞
⎠
⎟
Q
2
⎛
⎝
⎜

⎞
⎠
⎟
D
Q
⎛
⎝
⎜
⎞
⎠
⎟
Q
2
⎛
⎝
⎜
⎞
⎠
⎟
=
D
Q
æ
è

ç
ö
ø
÷
S
R
+
Q
2
æ
è
ç
ö
ø
÷
h
R
C
R
+
D
Q
æ
è
ç
ö
ø
÷
S
M
+
Q
2
æ
è
ç

ö
ø
÷
h
M
C
M
Q* =
2D(SR +SM )
hRCR +hMCM
= 9,165
Q*=
2D(S
R
+S
M
)
h
R
C
R
+h
M
C
M
=9,165
Annual cost for DO =
D
Q *
⎛

⎝
⎜
⎞
⎠
⎟
Q *
2
⎛
⎝
⎜
⎞
⎠
⎟
Annual cost for DO=
D
Q*
æ
è
ç
ö
ø
÷
S
R
+
Q*
2

æ
è
ç
ö
ø
÷
h
R
C
R
=$4,059
Annual cost for manufacturer =
D
Q *
⎛
⎝
⎜
⎞
⎠
⎟
Q *
2
⎛
⎝
⎜
⎞

⎠
⎟
Annual cost for manufacturer=
D
Q*
æ
è
ç
ö
ø
÷
S
M
+
Q*
2
æ
è
ç
ö
ø
÷
h
M
C
M
=$5,106
ProfR = (p–CR)(360,000–60,000p)
ProfM = (CR –CM )(360,000–60,000p)
Prof
R
=(p–C

R
)(360,000–60,000p)
Prof
M
=(C
R
–C
M
)(360,000–60,000p)
p = 3+
CR
2
p=3+
C
R
2
ProfM = (CR –CM ) 360,000–60,000 3+
CR
2
⎛
⎝
⎜
⎞
⎠
⎟
⎛

⎝
⎜ ⎜
⎞
⎠
⎟ ⎟
Prof
M
=(C
R
–C
M
)360,000–60,0003+
C
R
2
æ
è
ç
ö
ø
÷
æ
è
ç
ç
ö
ø
÷
÷
= (CR –2)(180,000–30,000CR)

=(C
R
–2)(180,000–30,000C
R
)
p = 3+
CM
2
= 3+
2
2
= $4
p=3+
C
M
2
=3+
2
2
=$4
Qd =
dD
(C –d)h
+
CQ *
C –d
Q

d
=
dD
(C–d)h
+
CQ*
C–d
Forward buy = Qd – Q *
Forward buy=Q
d
–Q*
Qd =
dD
(C –d)h
+
CQ *
C –d
Q
d
=
dD
(C–d)h
+
CQ*
C–d
=
0.15×120,000

(3.00–0.15)×0.20
+
3×6,324
3.00–0.15
= 38,236
=
0.15´120,000
(3.00–0.15)´0.20
+
3´6,324
3.00–0.15
=38,236
0
05
240
000
1
00
0
05
0
25
1
240
000
1
00
0
05
71
579
.
,

(
.
.
)
.
,
.
.
,
´
-
´
+
´
-
=
Chapter 11 • Managing Economies of Scale in a Supply Chain:
Cycle Inventory 307
• 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 who reorder less frequently than the
supplier.
• For customers with a shorter reorder interval than the supplier,
make the supplier’s reorder
interval an integer multiple of the customer’s interval and
synchronize replenishment at the
two stages 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 the supplier, where k
is an integer.
• The relative frequency of reordering depends on the setup
cost, holding cost, and demand
at different parties.
Whereas the integer policies discussed above synchronize
replenishment within the supply
chain and decrease cycle inventories, they increase safety
inventories , because of the lack of flexi-
bility with the timing of a reorder, as discussed in Chapter 12.
Thus, these polices make the most
sense for supply chains in which cycle inventories are large and
demand is relatively predictable.
11.7 SUMMARY OF LEARNING OBJECTIVES
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
Group of
Customers
Stage
1
Stage
2
Stage

3
Stage
4
Stage
5
FIGURE 11-8 A Multiechelon Distribution Supply Chain
Key Point
Integer replenishment policies can be synchronized in
multiechelon supply chains to keep cycle inventory
and order costs low. Under such policies, the reorder interval at
any stage is an integer multiple of a base
reorder interval. Synchronized integer replenishment policies
facilitate a high level of cross-docking
across the supply chain.
307
10
Coordination in a Supply Chain
PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
1-‹#›

Hall.
Hall.
Hall.
1-‹#›
Hall.
1-‹#›
Hall.
10-‹#›
Hall.
10-‹#›
Hall.
1
Learning Objectives
Describe supply chain coordination and the bullwhip effect, and
their impact on supply chain performance.
Identify obstacles to coordination in a supply chain.
Discuss managerial levers that help achieve coordination in a
supply chain.
Understand the different forms of collaborative planning,
forecasting, and replenishment possible in a supply chain.
10-‹#›
Hall.
10-‹#›

Hall.
2
Lack of Supply Chain Coordination
and the Bullwhip Effect
Supply chain coordination – all stages of the chain take actions
that are aligned and increase total supply chain surplus
Requires that each stage share information and take into account
the effects of its actions on the other stages
Lack of coordination results when:
Objectives of different stages conflict
Information moving between stages is delayed or distorted
10-‹#›
Hall.
10-‹#›
Hall.
Lack co-ordintation tend to be higher when more and more
complex a supply chain is. E.g. having thousand of suppliers
and lack of communication. E.g. Ford having thousand of
suppliers.
3
Bullwhip Effect
Fluctuations in orders increase as they move up the supply
chain from retailers to wholesalers to manufacturers to suppliers
Distorts demand information within the supply chain
Results from a loss of supply chain coordination
10-‹#›

Hall.
10-‹#›
Hall.
4
Demand at Different Stages
Figure 10-1
1
2
3
4
distributors
10-‹#›
Hall.
10-‹#›
Hall.
Fluctuations are low in the beginning and gets higher
downstream
Creates problem with inventory
E.g. Walmart- decide to place a bigger order with the
distributer. So they believe that there is a rise in demand and
then they then place a higher order with manufacturer and then
they place a bigger order with supplier. Then in another period
the promotion is over and the orders is then reduced and then
the orders are then reduced and this is the bull-whip effect.

5
The Effect on Performance
Supply chain lacks coordination if each stage optimizes only its
local objective
Reduces total profits
Performance measures include
Manufacturing cost
Inventory cost
Replenishment lead time
Transportation cost
Labor cost for shipping and receiving
Level of product availability
Relationships across the supply chain
10-‹#›
Hall.
10-‹#›
Hall.
Manufacturing cost ( Increase) Why ? Capacity and inventory
Inventory cost( Increase)
Replenishment lead time( Increase) orders are not put in time
and
Transportation cost( Increase)
Labor cost for shipping and receiving ( Increase) – carry excess
labour capacity or fluctuation such as sub-contract etc.
Level of product availability ( decrease) – retailer will run out
of stock
Relationships across the supply chain ( causes lack of trust and

conflict)
6
The Effect on PerformancePerformance MeasureImpact of the
Lack of CoordinationManufacturing costIncreasesInventory
costIncreasesReplenishment lead timeIncreasesTransportation
costIncreasesShipping and receiving costIncreasesLevel of
product availabilityDecreasesProfitabilityDecreases
Table 10-1
10-‹#›
Hall.
10-‹#›
Hall.
7
Obstacles to Coordination
in a Supply Chain
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
10-‹#›
Hall.
10-‹#›
Hall.

Conflict when departments are focused on their individual goals
and not the overall strategic goal of the organization as a whole.
8
Incentive Obstacles
Occur when incentives offered to different stages or participants
in a supply chain lead to actions that increase variability and
reduce total supply chain profits
Local optimization within functions or stages of a supply chain
Sales force incentives
10-‹#›
Hall.
10-‹#›
Hall.
E.g. local optimization. When incentives are only within local
optimization only for retailer, distributor or supplier it will not
be cohesive. e.g. being part of a team as a soccer player but
only hogging the ball and never using your team make to score a
goal.
Sales Force Incentives
Quantity sold to distributors/retailers (sell-in)
Quantity sold to final customers (sell-through)
9
Information Processing Obstacles
When demand information is distorted as it moves between
different stages of the supply chain, leading to increased
variability in orders within the supply chain
Forecasting based on orders, not customer demand
Lack of information sharing

10-‹#›
Hall.
10-‹#›
Hall.
Eg- customer to retailer to wholesaler … supplier demand is
distorted.. Wholesaler forecast is based on orders and not
customer demand
E.g. Walmart is having a promotion for product and wholesaler
and manufacturer are not aware of the promotion they plan the
same forecast for future as a permanent forecast. But when the
oreder return to normal the manufacturer may believe that the
orders of demand is now lower and may then order smaller lots.
10
Occur when placing and filling orders lead to an increase in
variability
Ordering in large lots
Large replenishment lead times
Rationing and shortage gaming
10-‹#›
Hall.
10-‹#›
Hall.
Large lots. Demand fluctuations are smaller from retailer but
then orders are done in larger lots due the time of
replenishment. E.g. Demand every week but orders are placed

every 5 weeks.
Large Replenishment Lead Times: eg lead time is 1 week.
Retailer thinks that it will take 1 week to get items. Retailer see
a growth in demand they will make an adjustment. But what if
they have a lead time of 8 weeks they will then project a larger
order. This will cause huge fluctuations when lead times are
greater.
Rationing: high demand products and short supply-
Shortage gaming: what is the order size: retailer as for 100 and
wholesaler gives 75 so next time they may ask for 125 to get the
100
11
Figure 10-2
10-‹#›
Hall.
10-‹#›
Hall.
12
Pricing Obstacles
When pricing policies for a product lead to an increase in
variability of orders placed
Lot-size based quantity decisions
Price fluctuations

10-‹#›
Hall.
10-‹#›
Hall.
E.g. LS: Discounts are offered based on lot sizes. And then
lot sizes are bigger and bigger.
PF: Short term discounts that causes forward buying by
wholesalers or retailer.
13
Pricing Obstacles
Figure 10-3
10-‹#›
Hall.
10-‹#›
Hall.
14
Behavioral Obstacles
Problems in learning within organizations that contribute to
information distortion
Each stage of the supply chain views its actions locally and is
unable to see the impact of its actions on other stages
Different stages of the supply chain react to the current local
situation rather than trying to identify the root causes

Different stages of the supply chain blame one another for the
fluctuations ( Causes lack of trust)
No stage of the supply chain learns from its actions over time
A lack of trust among supply chain partners causes them to be
opportunistic at the expense of overall supply chain
performance
10-‹#›
Hall.
10-‹#›
Hall.
15
Managerial Levers to
Achieve Coordination
Aligning goals and incentives
Improving information accuracy
Improving operational performance
Designing pricing strategies to stabilize orders
Building strategic partnerships and trust
10-‹#›
Hall.
10-‹#›
Hall.
How coordination can be improved
16
Aligning Goals and Incentives

Align goals and incentives so that every participant in supply
chain activities works to maximize total supply chain profits
Align goals across the supply chain
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sell-
through (by the retailer)
10-‹#›
Hall.
10-‹#›
Hall.
E.g. Walmart pays HP for each printer sold. HP directly has
information straight from customer.
17
Improving Information Visibility and Accuracy
Sharing point of sale data (customer demand data)
Implementing collaborative forecasting and planning
Designing single-stage control of replenishment (information
sharing)
Continuous replenishment programs (CRP)
Vendor managed inventory (VMI)
10-‹#›
Hall.
10-‹#›

Hall.
E.g. Walmart assign one of its suppliers as the leader for each
major product category. They are responsible for store level
replenishment.
18
Improving Operational Performance
Reducing replenishment lead time
Reducing lot sizes
Rationing based on past sales and sharing information to limit
gaming
10-‹#›
Hall.
10-‹#›
Hall.
Online ordering or EDI- Electronic Data Interchange
Information is not as distorted in smaller lot sizes because it is
more often. (RFID)
Rationing based on PS and LG: manufacturer can look at past
sales data and then do rationing based on that data.
19
Designing Pricing Strategies
to Stabilize Orders
Encouraging retailers to order in smaller lots and reduce
forward buying
Moving from lot size-based to volume-based quantity discounts
Stabilizing pricing
Building strategic partnerships and trust
10-‹#›

Hall.
10-‹#›
Hall.
Lot size tend to create bigger fluctuations
Volume Based quantity discounts is based on overall purchased
in a specific period e.g. quarter or year.
Improve order coordination.
Stabalize pricing- no promotings- Everyday low prices less
fluctuations (no forward buying needed)
20
Continuous Replenishment and Vendor-Managed Inventories
A single point of replenishment
CRP – wholesaler or manufacturer replenishes based on POS
(point of sale) data
VMI – manufacturer or supplier is responsible for all decisions
regarding inventory
Substitutes
10-‹#›
Hall.
10-‹#›
Hall.
Continuous replenishment program
Vendor managed inventories.
21
Collaborative Planning, Forecasting, and Replenishment (CPFR)
Sellers and buyers in a supply chain may collaborate along any

or all of the following
Strategy and planning
Demand and supply management
Execution
Analysis
Retail event collaboration
DC replenishment collaboration
10-‹#›
Hall.
10-‹#›
Hall.
Visibility in the supply chain, minimize excess inventory
22
Common CPFR ScenariosCPFR ScenarioWhere Applied in
Supply ChainIndustries Where AppliedRetail event
collaborationHighly promoted channels or categoriesAll
industries other than those that practice EDLPDC replenishment
collaborationRetail DC or distributor DCDrugstores, hardware,
groceryStore replenishment collaborationDirect store delivery
or retail DC-to-store deliveryMass merchants, club
storesCollaborative assortment planningApparel and seasonal
goodsDepartment stores, specialty retail
Table 10-2
10-‹#›
Hall.
10-‹#›
Hall.

23
Store replenishment collaboration
Collaborative assortment planning
Organizational and technology requirements for successful
CPFR
Risks and hurdles for a CPFR implementation
10-‹#›
Hall.
10-‹#›
Hall.
24
Figure 10-4
10-‹#›
Hall.
10-‹#›
Hall.
-blockchain
25
Achieving Coordination in Practice

Quantify the bullwhip effect
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages
Try to achieve coordination in the entire supply chain network
Use technology to improve connectivity in the supply chain
Share the benefits of coordination equitably
10-‹#›
Hall.
10-‹#›
Hall.
Bullwhip effect is to match supply with demand. Minimum and
maximum you want to keep it all in alignment with all parties.
Supplier, manufacturer and retailer to do what : keep cost down.
26
Describe supply chain coordination and the bullwhip effect, and
their impact on supply chain performance
Identify obstacles to coordination in a supply chain
Discuss managerial levers that help achieve coordination in a
supply chain
Understand the different forms of CPFR possible in a supply
chain
10-‹#›
Hall.
10-‹#›
Hall.

Depends on your business model and when you are going plan
activities.
Block Chain:
https://www.linkedin.com/learning/search?keywords=block%20
chain%20in%20supply%20chain&u=26194554
27
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher.
Printed in the United States of America.
10-‹#›
Hall.
10-‹#›
Hall.
28
Chapter 10 • Coordination in a Supply Chain 251
1000
900
800
700
600
500
400
300

200
100
0
W
ho
le
sa
le
r
O
rd
er
1000
900
800
700
600
500
400
300
200
100
0
C
on
su

m
er
D
em
an
d
1000
900
800
700
600
500
400
300
200
100
0
M
an
uf
ac
tu
re
r
O
rd

er
1000
900
800
700
600
500
400
300
200
100
0
R
et
ai
le
r
O
rd
er
1 5 9 13 17 21 25 29 33 37 41
1 5 9 13 17 21 25 29 33 37 41 1 4 7 10 13 16 192225 28 313437
40
1 5 9 13 17 21 25 29 33 37 41

Time Time
Time Time
Wholesaler’s Orders to Manufacturer
Consumer Sales at Retailer
Manufacturer’s Orders with Supplier
Retailer’s Orders to Wholesaler
FIGURE 10-1 Demand Fluctuations at Different Stages of a
Supply Chain
to coordinate information exchange with thousands of suppliers
and dealers. The fundamental
challenge today is for supply chains to achieve coordination in
spite of multiple ownership and
increased product variety.
One outcome of the lack of supply chain coordination is the
bullwhip effect, in which
fluctuations in orders increase as they move up the supply chain
from retailers to wholesalers
to manufacturers to suppliers, as shown in Figure 10-1. The
bullwhip effect distorts demand
information within the supply chain, with each stage having a
different estimate of what
demand looks like.
Procter & Gamble (P&G) has observed the bullwhip effect in
the supply chain for Pampers
diapers.1 The company found that raw material orders from
P&G to its suppliers fluctuated
significantly over time. Farther down the chain, when sales at

retail stores were studied, the
fluctuations, while present, were small. It is reasonable to
assume that the consumers of diapers
(babies) at the last stage of the supply chain used them at a
steady rate. Although consumption of
the end product was stable, orders for raw material were highly
variable, increasing costs and
making it difficult to match supply and demand.
HP also found that the fluctuation in orders increased
significantly as they moved from the
resellers up the supply chain to the printer division to the
integrated circuit division.2 Once again,
1 Lee, Padmanabhan, and Whang (1997).
2 Ibid.
251

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