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In class discussion

In class discussion. The class should read prior to the discussion the following pages: Chapter 10, pages 246-259 and 273-278. Where do you get values for h , S ?. Textbook Not easy in real life! Holding cost, h Cost of capital (opportunity cost) Weighted average cost of capital

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In class discussion

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  1. In class discussion • The class should read prior to the discussion the following pages: • Chapter 10, pages 246-259 and 273-278

  2. Where do you get values for h, S? • Textbook • Not easy in real life! • Holding cost, h • Cost of capital (opportunity cost) • Weighted average cost of capital • Obsolescence • Shrinkage (theft, breakage, etc.) • Handling cost • storage • Order cost, S • Transportation • Administrative

  3. Why do you shop at Sam’s? • Quantity Discounts • All units discount • Marginal unit quantity discount • Useful for achieving supply chain coordination • A supply chain is coordinated if decisions made by retailer and supplier maximize the supply chain profile.

  4. Supply Chain Coordination Example Drugs Online sells vitamins. Demand for the vitamins has been estimated at 10,000 bottles per month. Fixed costs for transportation and administration have been found to be $100 per order. Holding costs are 20% and the vitamin manufacturer charges Drugs Online $3 per bottle. How many bottles should Drugs Online order? What is annual controllable costs of this policy?

  5. Example continued • Now, consider vitamin manufacturer Manufacturer must process, pack, and ship order. Fixed cost for this is $250. Each bottle of vitamins costs the manufacturer $2 to make. Holding costs are 20%. What are manufacturer’s annual controllable costs? $6,009 What are total annual supply chain controllable costs? $3,795 + $6,009 = $9,804

  6. Example continued • Can we do better for the supply chain? Retailer Controllable Costs Ordering: D/Q*S = (120,000/9165)*100 = $1309 Holding: Q/2*hC = 9165/2*0.2*3 = $2749 Total: $1309 + $2749 = $4058 Manufacturer Controllable Costs Ordering: D/Q*S = (120,000/9165)*250 = $3273 Holding: Q/2*hC = 9165/2*0.2*2 = $1833 Total: $3273 + $1833 = $5106

  7. EOQ with Trade Promotions (Sec. 10.5) d = Discount Optimal Order Quantity Example 7.8: Drug manufacturer offers a discount of $0.15 for bottles purchased by retailers during the next month. How many bottles should Drugs Online buy during the promotion? Previous book example (w/o discount, D=120,000, s=$100, h=,2, c=$3, Q* With Discount:

  8. The Dangers of Offering Sales in a Supply Chain • Results in forward buying (instead of ordering for 2 months you are ordering for 4 months and it will get harder for the manufacturer to produce on that level and additionally will cost the retailer more holding costs) • Distorts true demand (increases difficulty of predicting demand because of spikes in demand due to promotion) • High inventory holding costs (for the retailer) • Difficult to plan production (manufacturer)

  9. Weekly Consumption of Chicken Noodle Soup

  10. Weekly Shipments of Chicken Noodle Soup Result of Forward Buying

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