Exam 11: Managing Economies of Scale in the Supply Chain: Cycle Inventory

Scenario 11.1 - Bubble and Squeak The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas. -What is the cost of the inventory policy (excluding cost of goods) if the diner orders at the economic order quantity?

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to exploit economies of scale and increase cost.

When demand is steady, cycle inventory and lot size are related as

All costs that do not vary with the size of the order but are incurred each time an order is placed are referred to as

Scenario 11.3 - Sammy's Sammwiches Sammy's is the hot new lunch spot among the hipsters, who flock there at noon for their artisanal peanut butter and jelly sandwiches, which sell for $12.95. The sandwiches are made from two slices of their own artisanal bread, which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices). The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%, since freshness is important in baking as well as to hipsters. The cost to run a new batch of a dough is $3 per loaf. Sammy's sells their sandwiches at a rate of fifty per hour. -What is the cost to run Sammy's at the economic production lot size?

A key to reducing lot size without increasing costs is to

Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers.

Which cost should reflect the incremental change in space cost due to changing cycle inventory?

Inventory holding costs would include which of the following?

Scenario 11.4 - Caffeine and Sugar With a fixed cost of $100 per order, Nathan decided it was vital to get his money's worth. His monthly demand for energy drinks was 10,000 bottles and holding cost was estimated at 20% of unit cost. The mail order company offered him a couple of possibilities - he could pay $4.00 per bottle for orders of up to 10,000 bottles. After that threshold, he would pay only $3.98 per bottle, and if he ordered 20,00 or more bottles in an order, he would pay only $3.96 per bottle. -What is the best order quantity for Nathan to use?

Trade promotions lead to a significant ________ in lot size and cycle inventory because of forward buying by the ________.

________ is the practice whereby a firm charges differential prices to maximize profits.

A discount is volume-based if the pricing schedule offers discounts based on the quantity ordered in a single lot.

A key to reducing cycle inventory is the reduction of lot size.

Which cost should only include receiving and storage costs that vary with the quantity of product received?

Price discrimination is the practice where a firm charges differential prices to maximize profits.

Scenario 11.2 - S&H Mercantile The S&H Mercantile in Luther is the only game in town for a number of items, and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square inches of shelf space. The shelf space available for this item measures five feet by four feet. The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store. The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased. -Drought conditions spike demand during the summer to an annualized rate of 27,000 cans per year and the price rises to $12 per can. If the ordering cost per lot is 75 cents, what is the holding cost percentage?

A price discount where the pricing schedule offers discounts based on the quantity ordered in a single lot is

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to

Scenario 11.1 - Bubble and Squeak The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas. -What is the average inventory if they order at the optimal order quantity?