Discuss the role of cycle inventory in the supply chain

Question

What will be an ideal response?

Answer 1

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.