supplies4medics.

com

Founded almost 20 years ago, supplies4medics.com has become one of Europe’s most

successful direct mail suppliers of medical hardware and consumables to hospitals, doctors’

and dentists’ surgeries, clinics, nursing homes and other medical-related organizations. Its

physical and on-line catalogues list just over four thousand items, categorized by broad

applications such as ‘hygiene consumables’ and ‘surgeons’ instruments’. Quoting their web

site:

“We are the pan-European distributors of wholesale medical and safety supplies... We aim to

carry everything you might ever need; from nurses’ scrubs to medical kits, consumables for

operations, first aid kits, safety products, chemicals, fire-fighting equipment, nurse and

physicians’ supplies, etc. Everything is at affordable prices - and backed by our very superior

customer service and support – supplies4medics is your ideal source for all medical

supplies. Orders are normally despatched same-day, via our European distribution partner,

the Brussels Hub of DHL. You should therefore receive your complete order within one week,

but you can request next day delivery if required, for a small extra charge. You can order our

printed catalogue on the link at the bottom of this page, or shop on our easy-to-use on-line

store.”

Last year turnover grew by over 25% to about 120 million Euro, a cause for considerable

satisfaction in the company. However, profit growth was less spectacular; and market

research suggested that customer satisfaction, although generally good, was slowly declining.

Most worrying, inventory levels had grown faster than sales revenue, in percentage terms.

This was putting a strain on cash flow, requiring the company to borrow more cash to fund the

rapid growth planned for the next year. Inventory holding is estimated to be costing around

15% per annum, taking account of the cost of borrowing, insurance, and all warehousing

overheads.

Pierre Lamouche, the Head of Operations summarized the situation faced by his department:

“As a matter of urgency, we are reviewing our purchasing and inventory management
systems! Most of our existing re-order levels (ROL) and re-order quantities (ROQ) were set

several years ago, and have never been recalculated. Our focus has been on rapid growth

through the introduction of new product lines. For more recently introduced items, the ROQs

were based only on forecast sales, which actually can be quite misleading. We estimate that

it costs us, on average, 50 Euros to place and administer every purchase order, since most

suppliers are still not able to take orders over the Internet or by EDI. In the meantime, sales

of some products have grown fast, whilst others have declined. Our average inventory (stock)

cover is about 10 weeks, but…amazingly… we still run out of critical items! In fact, on

average, we are currently out of stock of about 500 SKUs (Stock Keeping Units) at any time.

As you can imagine, our service level is not always satisfactory with this situation. We really

need help to conduct a review of our system, so have employed a mature intern from the

local business school to review our system. He has first asked my team to provide information

on a random, representative sample of twenty items from the full catalogue range, which is

copied below.”

Table 13.10: Representative Sample of Twenty Catalogue Items

Sample Catalogue Sales Unit Description ** Sales Last 12 Inventory Re-order

Number Reference Unit Cost months’ as at last Quantity

Number* (Euro) Sales year end (units)

(units) (units)

1 11036 Disposable Aprons (10pk) 2.40 100 0 10

2 11456 Ear-loop Masks(Box) 3.60 6000 120 1000

3 11563 Drill Type 164 1.10 220 420 250

4 12054 Incontinence Pads Large 3.50 35400 8500 10000

5 12372 150ml Syringe 11.30 430 120 100

6 12774 Rectal Speculum 3 Prong 17.40 65 20 20

7 12979 Pocket Organiser Blue 7.00 120 160 500

8 13063 Oxygen Trauma Kit 187.00 40 2 10

9 13236 Zinc Oxide Tape 1.50 1260 0 50

10 13454 Dual Head Stethoscope 6.25 10 16 25

11 13597 Disp. Latex Catheter 0.60 3560 12 20

12 13999 Roll-up Wheelchair Ramp 152.50 12 44 50

13 14068 WashClene Tube 1.40 22500 10500 8000

14 14242 Cervical Collar 12.00 140 24 20

15 14310 Head Wedge 89.00 44 2 10

16 14405 Three-Wheel Scooter 755.00 14 5 5

17 14456 Neonatal Trach. Tube 80.40 268 6 100

18 14675 Mouldable Strip Paste 10.20 1250 172 100

19 14854 Sequential Comp. Pump 430.00 430 40 50

20 24943 Toilet Safety Frame 25.60 560 18 20

* Reference numbers are allocated sequentially as new items are added to catalogue

** all quantities are in sales units (eg item, box, case, pack)

Questions

1. Prepare a spreadsheet-based ABC analysis of Usage Value. Classify as follows:

A-Items: top 20% of Usage Value

B-Items: next 30% of Usage Value C-

Items: remaining 50% of Usage Value

2. Calculate the inventory weeks for each item, for each classification, and for all the items in

total. Does this suggest that the OM’s estimate of inventory weeks is correct? 3. If so, what is

your estimate of the overall inventory at the end of the base year, and how much might that

have increased during the year?

4. Based on the sample, analyze the underlying causes of the availability problem described

in the text.

5. Calculate the EOQs for the A Items.

6. What recommendations would you give to the company?