Logistic management case study

Chapter 9 – Inventory Management

In-class exercises and discussion points

Note that the chapter contains a number of worked problems (both within and at the end of the chapter) which you could also get students to work through in class.

Medical Devices Company case study (end of Part 1)

Although introduced into the book as a general case at the end of Part 1, this case, which is quite concise, could be worked through in class as it highlights various inventory management issues (the core concern in the case is that there is too much inventory in the system). MDC needs to first classify and then manage its inventory much more effectively.

Solutions to end of chapter questions

· Explain how a reduction in lead time can help a supply chain reduce its inventory buffer without hurting customer service

Reducing lead time increases the accuracy of forecast demand, thus requiring less inventory buffer. Safety stock is needed to cover demand during lead time. As lead time increases, the variation of demand during the lead time increases too. This necessitates carrying more safety stock to cover the variation. A reduction in lead time acts in the opposite way, reducing the safety stock needed.

· Why are Internet retailers often able to provide a variety of different products for sale with less inventory than traditional ‘bricks and mortar’ retail stores?

By centralising their entire inventory in very few locations they only need to cope with the total demand, not individual demand at the retail stores. The variation in total demand is relatively less than the individual demands. So they need less safety stock.

· Discuss the concept of replacing inventory by information

In this concept, rather than holding inventory physically on hand, a business holds the information on the quantity and location of inventory. Any customer demand is then met from a nearby location. This inventory concept allows lower inventory holding, at a few strategic locations. A possible disadvantage of this concept is the delay in meeting customer demand while a delivery is arranged.

· Why should a customer be concerned about transit inventory cost, if they pay for the inventory only when the merchandise arrives at their premises?

Wherever costs are incurred in the supply chain, they are ultimately passed to the end consumer. Thus the competitiveness of the entire supply chain is affected by transit inventory costs.

Extra essay style question

· You have been tasked with a consultancy assignment to increase inventory turnover for a retailer of sports clothing. Outline how you would conduct such an assignment.

Students can make their own assumptions about the retailer, although they will likely note issues such as the fact that seasonality of demand for different types of clothing is likely to be a big issue. Another issue might be ‘spikes’ in demand for certain items – for example t-shirts worn by a very popular soccer team who become increasingly popular as a result of winning particular matches. The starting point for the assignment is likely be an assessment of current inventory performance (inventory turns) and benchmarking against best practice. Once such data is known, the assignment would then progress to evaluating how inventory is both managed (including approach to classification) and controlled (including reordering strategy) in the system. Various issues (for example in-transit inventory) and strategies for managing and reducing inventory can next be considered (centralisation, delayed product differentiation, part commonality, pooling, reduction of variation and lead time, and application of JIT) can next be considered.

More questions

· How does part commonality reduce inventory holding?

· How does delayed product differentiation help in reducing inventory?

Extra Problem

Hamilton Fabricators at Te Rapa orders steel plates from the Te Akau steel plant on a regular basis. An investigation revealed the following details:

Annual demand = 5,000 tons

Cost of steel = $ 2,000 per ton

Current order size = 500 tons, transported by TranzRail

TranzRail transport cost = $100 per ton

Safety inventory carried = 50% of demand during replenishment lead time

Inventory holding cost = 25% of purchase price per year

Replenishment lead time = 5 days

Calculate the transit inventory cost, the safety inventory cost, and thetransportation cost on an annual basis.

Answer:

H = 2000 ( 25% = $500 / ton / year

Annual transit inventory cost = D ( L ( H = 5000 ( (5 / 365) ( 500 = $ 34246.58

SS = 5000 ( (5 / 365) ( 50% = 34.25 tons

Annual safety inventory cost = SS ( H = 34.25 ( 500 = $ 17,125.00

Annual transportation cost = 5000 ( 100 = $ 500,000.00