4.1 Managing Economies of Scale Flashcards
Lot of batch size
the quantity in one order
average cost per unit purchased is a key cost in the lot-sizing decision
Cycle Inventory
the average inventory in a supply chain
half the lot size
Flow time
the average time a product spends in the supply chain
=Q/2D
the larger the inventory, the longer the lag time between when a product is purchased and sold -> vulnerable to demand changes
Lower cycle inventory
shorter average flow time
lower working capital requirements
lower inventory holding costs
Cycle inventory is held to
take advantage of economies of scale
smooth the supply between different stages
protect against stock-outs
Inventory holding cost
cost to physically carry an item in inventory
H = unit per year
H = hC
h: annual interest rate percentage
C: unit production cost
Holding cost increases as the following cost items increase
opportunity cost of capital
insurance, tax, storage
obsolescence and spoilage
Ordering cost
S
cost of the order placement, not including purchase cost
charged every time an order is placed
independent of the order size
Total cost =
material cost+holding cost+ordering cost
Economic Order Quantity (EOQ)
the order quantity that minimises the total cost
the point where the holding cost and ordering cost are the same
Economic Production Quantity (EPQ)
the optimal number of items to be produced in a production run to minimise the total annual cost
