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CHAPTER 8
Quantity and Inventory
Chapter Outline
Quantity and Timing Issues The Forms of Inventory

Quantity and Delivery Inventory Function and Form Framework
Time-Based Strategies Inventory Management
Forecasting Costs of Inventories
Forecasting Techniques ABC Classification
Collaborative Planning, Forecasting, and Vendor- or Supplier-Managed Inventory
Replenishment (CPFR) (VMI/SMI)
Determining Order Quantities and Inventory Lean Supply, Just-in-Time (JIT), and
Levels Kanban Systems
Fixed-Quantity Models Managing Supply Chain Inventories
Fixed-Period Models Determining Quantity of Services
Probabilistic Models and Service Coverage Aggregating Demand
Buffer or Safety Stocks and Service Levels Managing Consumption
Planning Requirements and Resources Dimensions of Services and Quantity
Material Requirements Planning (MRP) Decisions
Capacity Requirements Planning (CRP) Conclusion
Manufacturing Resource Planning Questions for Review and Discussion
(MRP II) References
Demand Driven MRP Cases
Enterprise Resource Planning (ERP) Case 8-1 Lisa Caruso
Systems Case 8-2 Throsel-Teskey Drilling
Supply Implications of MRP Case 8-3 Sondra Fox
Functions and Forms of Inventories
The Functions of Inventory
116
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QUANTITY AND INVENTORY 117
Case 8-1: Lisa Caruso
Teaching Note
IMMEDIATE ISSUE
What should be done about the stockroom operations and Morrison?
BASIC ISSUES
• ABC analysis
• Inventory control
• The nature of the manufacturing-purchasing interface
• Forecasting and planning.
SUGGESTED STUDENT ASSIGNMENT
As Lisa Caruso, what action would you take to improve stockroom operations at Morrison?
POSSIBLE DISCUSSION QUESTIONS
1. What are the key success factors for Morrison?

2. What must purchasing do well to contribute here?
3. What must the stockroom do well to contribute effectively?
4. What are the problems in the stockroom and what is causing them?
5. Why are stockroom operations step-up under the current system? What are the objectives?
6. How much money is Morrison losing because of the problems in the stockroom? What the cost
versus the benefit?
ANALYSIS
Despite its relatively small size, Morrison is a successful company in a competitive industry with
cyclical sales. David Morrison’s philosophy appears to be to keep the company lean and to keep a
tight control on expenses. Overhead appears to be low, as evidenced by the fact that there are only
30 non-production people at the company. Purchasing, including the stockroom, account for seven of
these people.
The company produced a high-quality, well-engineered product, presumably at a competitive price.

The case indicates that orders are custom work, although it is likely that certain designs and parts are
relatively standard.
Purchases account for approximately 56% of sales revenue. Thus, sound procurement is essential for
corporate success. With only two people in buying functions and increase volumes expected, one
might well imagine that this department is understaffed.
118 Chapter 8
The role of the stockroom1 at Morrison must be to add value, rather than cost. Support for
purchasing, manufacturing and service and repairs needs to be provided. Such support should be
evident in the availability of the appropriate parts and materials so as not to interfere with
production. It does not appear that the stockroom is fulfilling its mission as well now as it should.
Why a separate repair parts storage facility was required is not clear. There may well be considerable
duplication of inventory between the main stockroom and the stockroom in the maintenance and
repair department.
Ironically, high value items are stored near the place of use and the low value items in a separate
stockroom. In many organizations the reverse would make more sense. The primary argument for
storing low value items under lock and key must be fear of theft. Yet, many of the items carried do
not appear to have that much appeal. An extensive system of checking parts in and out for each
production worker may not be worth the amount saved in shrinkage.
Quantitative Analysis
An analysis of the data in the case provides an interesting insight into what is happening at
Morrison:
1. Purchases as a percentage of total sales are 56%, based on $28 million in purchases and total
sales of $50 million.
2. Stockroom purchases as a percentage of total purchase is 17% of $28 million, which is $4.76
million.
3. The case indicates that inventory in the stockroom ranges from $1.2 million to $3 million, which
averages $2.1 million. Presumably inventory averages $1.2 million during the nonpeak period. If
we assume an inventory carrying cost of 2% per month (or 24% per year) inventory carrying
costs would be $336,000 during the eight month peak period and $48,000 during the four month
nonpeak period, for a total of $384,000. With total store purchases of $4.76 million and average
weighted value of inventory of about $1.6 million, then inventory turns are about three times.
With 13,000 items in the stockroom, the average purchase value per item is $366. The average
inventory per item per year is approximately $1.6 million/13,000 = $123 per item.
4. ABC analysis of the stockroom items reveals a different pattern from the averages provided
above. If we apply the assumption that A items amount to 10% in number and 80 % in value, B
items 10% in number and 10% in value, and C items 80% in number and 10% in value, the
following emerges:
1
In the case the terms “stockroom” and “stores” are used interchangeably.
Table TN-1
ABC Analysis of Stockroom Inventory
Category Percent Percent # Items Annual Purchases/ Average Average

Items Total Value Purchases Item Inventory Inv./Item
A 10% 80% 1,300 $3.8 mm $2,923 $1.28 mm $985
B 10% 10% 1,300 $476,000 $366 $160,000 $123
C 80% 10% 10,400 $476,000 $46 $160,000 $15
Assumptions:
• 13,000 items
• Total annual purchases of $4.76 million
• Average inventory of $1.6 million
The ABC analysis shows that the C items only represent an average of $46 per year in purchases
per item and carrying only $15 per item in inventory. Assuming that the stockroom clerks devote
80% of their time to the C items, it is difficult to see how this time can be justified.
5. The annual salary for stockroom clerks was $50,000 or year, not including benefits and overtime.
With benefits representing 30%, the total wage and benefits cost represents $195,000 without
overtime.
6. With waiting times of 20 minutes per day per worker for four days per week for 30 weeks during
the peak season (February to September) for 140 workers, each being paid $22 per hour plus
30% for benefits, represents a total of 5,600 hours, $123,200 in wages and $160,160 in wages
and benefits. This cost only captures the time waiting in queues and does not take into account
the time taken to complete paperwork and walking to and from the stockroom, walking to get the
supervisor to open the stockroom, etc. One can envision that the total time taken by production
workers could be double this estimate.
7. Assuming the excess prices paid by purchasing only occurs during the peak season, the total cost
is approximately $70,000 per year. If the excess costs occur during the entire year, the total
would be $120,000 per year.
It is clear that there is a very high cost with stockroom operations and a substantial amount of this
cost does not show up on the stockroom budget. There are additional costs that are more difficult to
estimate. These might include lost and wasted supervisory time, possibility of late deliveries to
customers, space and capital tied up due to delays, strained supplier relations, extra material
handling, and administrative activities and paperwork, not to mention the frustration of the
employees involved. Clearly a better solution needs to be found.
120 Chapter 8
Alternatives
There are a number of alternatives available for Lisa, some of which include the following:
1. More stockroom clerks
A relatively simple solution would be to provide additional stockroom clerks. Ideally these clerks
should arrive before production starts first thing in the morning to make sure all requests are ready to
go out promptly. If we assume that the clerk would start one hour before the first shift started, this
would involve a 6:00 a.m. start and would go to 2:30 p.m. The second shift might start at 2:00 p.m.
to have some overlap. This would carry through to 10:30 p.m. The third shift could run from 10:00
p.m. to 6:30 a.m. This would give each shift a half hour overlap to discuss problems and coordinate
efforts. Probably two clerks are required for both the first and second shifts, with one clerk for the
midnight shift. This would require a total complement of five clerks, at an additional cost of
$100,000 per year plus benefits of $30,000. This level of staffing should reduce worker waiting time
substantially, on expediting and extra costs, and also on the amount of supervisory time taken to
address stockroom parts issues. Thus the $130,000 can probably be relatively easily justified in
terms of the expense versus the expected benefits. The saving would have to be monitored carefully
to ensure that the investment was indeed paying off.
2. Elimination of the Stockroom
A totally different perspective is why to have the stockroom at all? The main reasons appear to be
theft and inventory management/control. While it is likely that some of the items may be attractive
and subject to pilferage, most of them do not appear to be so special to require the careful treatment
that they now received.
Most of the parts in the stockroom are probably required in first and final assembly. Why should
these stockroom items not be located near the assembly areas where they are used in order to allow
ready access? This would eliminate a lot of the handling, running back and forth to the stockroom,
and administrative hassles (e.g., paperwork). It would be possible for purchasing to set up a system
to monitor inventories (e.g., a double bin system) and to replenish the items. Even if there is overlap
in parts or if the same part is required in different locations in the plant, these problems can be easily
overcome.
This alternative is a substantial departure from the current system and would likely reduce the
current level of staffing in the stockroom. It would also free-up workers in the plant for more
productive use of their time presently waiting at the stockroom and relieve the supervisors to a
significant degree from the responsibilities of addressing parts shortages.
3. Partial Decentralization of the Stockroom
If complete decentralization of the stockroom is not feasible, then a partial decentralization might
make sense. Almost all of the C items listed in Table TN-1 are candidates for decentralization. This
would remove approximately 80% of the parts along with the associated administrative costs and
hassles. It might also be possible to store some of the more attractive items on a decentralized basis
in locked storage areas where the supervisors would have access as required.
4. Kitting
A different type of solution which might be investigated is the use of kitting for some or all parts.
Kits of parts might be purchased from suppliers or made up in the stockroom area. Thus, for certain
types of assembly operations a worker would request a kit and receive all of the parts necessary for a
typical job. The advantage of this approach would be that expensive assembly labor could be saved
by using less expensive supplier labor to assemble the kits. It could also reduce the amount of
paperwork and theft would be discouraged. Kits could be distributed from assembly worker to
assembly worker at shift change without having to be turned back in to the stockroom. As a matter
of fact, this approach could be used with the current tray system, which could significantly reduce
the amount of waiting time and stockroom activity. The assembly workers on the first shift should be
requesting parts for the workers on the second shift, rather than for themselves for the subsequent
day.
5. Additional Ideas
There are some additional ideas might be entertained. For example, purchasing might consider
adopting systems contracting for a number of the stockroom items. A careful look at the higher value
items might show that a different form of procurement might be more appropriate that the one
currently in place. The A items, in particular, still amount to a significant dollar value.
Implementation Suggestions
It might be possible to test a “stock on the floor” plan with a particular department, such as the
welding department with the welding supplies or in final assembly where probably fewer parts are
required. This approach has the advantage of piloting the plan in a simplified setting. Positive results
can be used to support expansion of the approach.
Adding some temporary staff to the stockroom to get things straightened out and to take the load off
the existing staff would be a good short-term move until things get straightened out and the system is
revised. The plant manager and supervisors should be consulted regarding potential options and
action contemplated. It is difficult to see how they would have objections to changes that would
simplify operations in the plant and free up their time.
Lisa Caruso has enough information to make recommendations and make changes. There are
significant opportunities for improvement and she needs to get going before volume increases.
Key Points
We cannot look at purchasing or stockroom or other supply chain functions in isolation. They need
to be seen in context. For example, one way to look at the stockroom is strictly in terms of inventory
carried and salaries of employees. In this case, 13,000 items with an average inventory value of $2.1
million, salaries of $150,000 per year, and throughput of $4.8 million per year. A totally different
122 Chapter 8
way to look at the impact is to see what is being wasted. There is at least $70,000 per year in
additional purchase costs, $160,000 in production wages and benefits lost due to waiting at the
stockroom, and possibly another $160,000 in costs from time dedicated to administrative activities
and paperwork, walking, unknown supervisory time and effort, late deliveries to customers, loss of
goodwill from customers, space and capital tied up, and damaged supplier relations, not to mention
the frustration and morale of those concerned.
Some of the relevant information is often readily available, such as salaries, number of items of
inventory, and total inventory carried. Other data is obtainable, such as worker waiting time at stores
and premium prices paid for rush orders. Other data can only be estimated, such as the effect on
supplier and customer relations, frustration of people involved and mistakes made by people in the
rush period.
Adding more resources when people get busy is not always the best option and alternatives need to
be reviewed. Close cooperation from others in the organization is often required when changes to
supply chain systems are contemplated.
Case 8-2: Throsel-Teskey Drilling
Teaching Note
IMMEDIATE ISSUE
Prepare a plan for the CEO to reduce inventories.
BASIC ISSUES
1. Inventory management
2. Inventory systems
3. ABC analysis
4. Mergers and acquisitions
SUGGESTED STUDENT ASSIGNMENT
1. As Alison Burkett, what is your analysis of the inventory problem at Throsel-Teskey? What
recommendations would you make to John Dietrich?
POSSIBLE DISCUSSION QUESTIONS
1. Do you think that the budget is reasonable?

2. Why did John Dietrich expect total inventories to decline following the merger?
3. What controls do you want to put in place at the Phoenix warehouse?
4. How will you get the drilling foremen to buy into your plan?
5. What policies do you want to put in place at the drilling sites?
6. What target would you give to John Dietrich for his meeting next week?
ANALYSIS
As is the case with many mergers and acquisitions, a substantial portion of the “synergies” are
expected to come from purchasing in the form of lower supply costs, including an overall reduction
of inventories. The questions for Alison are: What is a reasonable inventory reduction target? And, if
her inventory target differs from the budget, then how can Alison justify the difference? It is not
clear from the case whether Alison had any substantial input to the original business plan, but most
likely she did not. Consequently, one of the traps is for Alison to achieve an artificial inventory
target.
Financial Analysis
The analysis in Exhibit TN-1 uses the data in case Exhibit 2 to compare the growth in sales and
inventory between January and May:
124 Chapter 8
Exhibit TN-1
Sales and Inventory Growth
Inventory Inventory Actual % Sales - % Sales - Sales Inventory

Budget Actual Variance Sales Budget Actual Increase Increase
Jan. 4,976,613 9,643,700 4,667,087 4,616,411 92.76% 47.87%
Feb. 5,007,262 10,165,100 5,157,838 5,293,460 105.72% 52.07% 14.67% 5.41%
March 5,098,347 11,834,900 6,736,553 6,254,323 122.67% 52.85% 18.15% 16.43%
April 5,090,657 12,040,600 6,949,943 6,212,472 122.04% 51.60% -0.67% 1.74%
May 5,186,393 12,584,000 7,397,607 6,050,000 116.65% 48.08% -2.62% 4.51%
Total 31.05% 30.49%
This analysis indicates that inventory and sales growth have remained virtually the same during the
most recent five months at approximately 30%. Consequently, one question for the students is how
should inventories respond to sales growth? For example, can companies expect economies of scale
through lower inventories as illustrated in Exhibit TN-2?
Exhibit TN-2
Relationship Between Sales and Inventory Growth
Total Sales
$
Inventory - Higher
Inventory - Same
Inventory - Lower
Time
One possible point of discussion in class is to explore the relationship between inventory and sales
growth as illustrated in Exhibit TN-2. The relationship implies a growth rate that is proportional,
higher or lower. A lower growth rate would imply opportunities for economies of scale. An
alternative hypothesis would be to suggest that inventory growth is a step function as opposed to a
continuous growth curve. The company likely expected to see savings as a result of consolidating
parts and supplies in Phoenix and eliminating inventory in Albuquerque. Theory would suggest that
centralized inventory would be lower than decentralized inventory, provided proper policies are in
place (e.g., managing safety stock). (For an illustration of the relationship between inventory and the
number of warehouses see Sorenson Research Company, HBS case 9677257.)
The case indicates that since the merger in October, sales had increased by 40%, while inventories
had increased by $6.594 million. Based on a 40% growth, sales were approximately $4.3 million in
October, providing the following comparison:
Exhibit TN-3
Sales and Inventory Growth October to May
Inventory Inventory Actual % Sales - % Sales - Sales Inventory

Budget Actual Variance Sales Budget Actual Increase Increase
Oct. 5,990,000 4,321,000 72.14%
Jan. 4,976,613 9,643,700 4,667,087 4,616,411 92.76% 47.87% 6.84% 61.00%
Feb. 5,007,262 10,165,100 5,157,838 5,293,460 105.72% 52.07% 14.67% 5.41%
March 5,098,347 11,834,900 6,736,553 6,254,323 122.67% 52.85% 18.15% 16.43%
April 5,090,657 12,040,600 6,949,943 6,212,472 122.04% 51.60% -0.67% 1.74%
May 5,186,393 12,584,000 7,397,607 6,050,000 116.65% 48.08% -2.62% 4.51%
Total 40.01% 110.08%
It would appear that during the period immediately following the merger inventories took a
significant step increase – by approximately 60%. It is possible that Alison’s efforts were focused in
other areas, including the consolidation in of warehousing in Phoenix.
The inventory target is significantly below current actual levels. Inventory levels would need to be
reduced by approximately $7.4 million to achieve the budgeted level of $5.2 million. Furthermore, it
appears that management planned on a $1 million decrease in inventories, from $5.99 million in
October to $$4.977 million (17%), as a result of consolidation and associated synergies. If
inventories levels had been allowed to increase at the same rate as sales, the target in the budget
would be $8.5 million, a 42% increase.
The case indicates that suppliers are extending lead times. Consequently, the company could be
carrying extra inventory to compensate for supply problems.
An interesting twist to this case that should not be ignored is the comment in the opening paragraph
about Jongsma expecting a 25% return on capital. As a private equity firm, Jongsma has a high cost
of capital and will press John Dietrich hard to free up working capital. The resulting cost of carrying
inventory for Throsel-Teskey would be 25% plus other inventory holding costs (e.g., warehouse
costs, staffing, obsolescence, etc.), which might represent a total of 35% to 40% per annum.
Possible Reasons for Inventory Problems
Inventory turns in May were approximately 2.1 times, versus 4.3 times in November (assuming $26
million in purchases). Sales as a percentage of total inventories have dropped from 72% to 48% (See
Exhibit TN-3). Major problems and possible causes include the following:
1) An absence of inventory policies. The company currently had approximately 145 drills in
operation. However, there are no policies that differentiate between sites based on, for example,
location or distance from Phoenix, type of drilling (surface or underground), conditions at the
site, etc. In addition, there are no policies or benchmarks based on production (e.g., inventory of
rods or drill bits per meter drilled per week).
126 Chapter 8
2) Inventory at the mine sites is not controlled properly: Although inventory at the mine sites
represents approximately 50% ($6.3 million) of total inventory, it is not monitored. Problems
include: lack of systems, absence of inventory policies and staff levels – Ken Jenner does not
appear to have time to control inventory at mine sites.
3) Inventory control systems in Phoenix (e.g., min/max and perpetual inventory systems) are not
set-up.
4) Accurate inventory data is not available. The data in the inventory management system is not up
to date. For example, inventory from Albuquerque was transferred to Phoenix but not entered
into system. Consequently, Alison does not know the actual inventory levels.
5) The merger has increased inventory complexity – the combined organization now does both
surface and underground drilling. For example, an increase in the number of SKUs for drilling
supplies.
6) Costs of drilling supplies have increased substantially.
7) Inventories at the drilling sites may not be controlled properly. Are there proper controls in
place? For example, are drills and rods used in a manner to maximize useful life? Are drilling
supplies susceptible to pilferage and other losses?
8) What is the quality of the budget? The expectations set in the budget may not be realistic given
current market conditions.
Alternatives
Alison can identify a number of recommendations in her report to John and several of these will
require the involvement of other managers in the company.
Inventory Policies
Inventory policies for mine sites need to be established. Management requires policies that define
how much inventory is required at each site based on a classification system. For example, based on
weekly production of 250 meters, inventory requirements for drilling supplies (e.g., rods and
diamond drill bits) could be established. Sites can be differentiated on the basis of the type of drilling
and the distance from Phoenix. As an example, the following categories could be used:
• Aboveground drilling, within 4-hour drive from Phoenix

• Aboveground drilling, more than 4-hour drive from Phoenix
• Aboveground drilling, international
• Underground drilling, within 4-hour drive from Phoenix
• Underground drilling, more than 4-hour drive from Phoenix
• Underground drilling, international
Alternative methods of segmentation might include other types of drilling (e.g., deep versus shallow
hole drilling or diameter of the drilling). The point is that some method of segmenting the inventory
is required. The greater the distance from the Phoenix warehouse, the greater the (safety stock)
inventory levels required at the sites. Sites locate close to Phoenix could carry minimal inventory
since delivery time is four hours or less. Centralizing (safety stock) inventory for local sites (e.g.,
within four hours) will help reduce inventory levels.
Inventory at Mine Sites
Presently the company has approximately $6.3 million in inventory at the drilling sites. However,
this inventory is not monitored. Consequently, there is a strong business case for hiring an inventory
analyst to analyze and manage this inventory, with responsibility for setting and monitoring
inventory levels at the drilling sites. In the short-term, this person could also be used to analyze
replenishment systems, including establishing min/max quantities and re-order points.
Once analysis of mine site inventory levels is complete and inventory policies are established,
monitoring drilling site inventory would likely not be a full-time position.
Inventory Control at Phoenix Warehouse and Accurate Inventory Data
A perpetual inventory system needs to be set-up and maintained for A items, including min/max
quantities. As a starting point, management needs to establish accurate inventory data. A plan,
including a schedule, needs to be worked out with the CFO to enter the item numbers into the system
and keep a perpetual inventory system up to date. A physical inventory will need to be completed.
Maintaining the inventory system may also require additional staff – management must be
disciplined and provide adequate resources (e.g., personnel) to keep the system up to date and follow
the min/max system for controlling inventory levels. B and C times could be controlled using a time-
based system (as is done now of all inventory items) or setting up a simple two-bin inventory
system.
Vendor Managed Inventory (VMI) Arrangements
Currently the company holds safety stock for drilling supplies in Phoenix. Management could
negotiate VMI arrangement with its primary supplier to hold safety stock for these SKUs, especially
low volume purchases. Working with the supplier to implement VMI for drilling supplies, represents
a potential significant opportunity to reduce inventory levels and Alison can negotiate with the
supplier to hold minimum safety stock for the company. For example, the supplier could carry safety
stock for the company’s rods, with promised same day service, effectively moving the safety stock at
Throsel-Teskey’s warehouse to the supplier. Since the supplier is local, delivery delays should be
negligible.
Standardization
Management should analyze purchases and identify opportunities for standardization. Analysis of
usage for each SKU can be used to set policies for inventory levels in the Phoenix warehouse.
Presently, management does not know the volume differences between SKUs and how this relates to
128 Chapter 8
inventory levels (e.g., safety stock). The most significant opportunity appears to be standardizing to
drilling supplies.
Albuquerque Warehouse
Currently, there is approximately $1.5 million in inventory at this location. A further review of the
warehouse in Albuquerque should be conducted to determine its role and evaluate the benefits of
maintaining this facility.
Setting Inventory Targets
Alison needs to get buy-in from John Dietrich regarding the resources required to improve the
inventory management practices at Throsel-Teskey. If she decides to pursue VMI arrangements,
John’s involvement will be required in the re-negotiation of the company’s new agreement with their
primary supplier. The result might be higher prices, but lower total costs.
A difficult issue is control of inventory at the Phoenix warehouse, including access by site foremen.
Locking them out of the warehouse may motivate the foremen to carry more inventory at their sites.
Furthermore, getting control of the $6.3 million of inventory at the drilling sites might be a major
problem. Experienced workers are in short supply and the drilling teams are paid on the basis of
production – they don’t want to be held up because of a shortage of rods or diamond drill bits.
Alison can start by setting targets by SKU for each site. For example, using the date in case Exhibit
2, she can set targets for Phoenix, Albuquerque and drill sites for rods and casings, drill bits,
wireline, drill parts, parts for equipment and other. Using ABC analysis, Alison can review the
company’s spend to identify additional major categories, especially in the “other” category. As an
example, assuming that the company uses 400 suppliers and spends approximately $13 million on
purchases other than drilling supplies:
% Suppliers % $ Spend # Suppliers $ Spend

A Items 10% 70% 40 $9.1 mm
B Items 10% 20% 40 2.6 mm
C Items 80% 10% 320 1.3 mm
100% 100% 400 $13 mm
The merger has created a much larger company that needs formalized systems. It is easier to manage
and control inventories in smaller companies if systems and processes are not in place. However,
complexity increases at a faster rate than sales and the company has reached a point where it needs a
formal approach to controlling its inventory investments.
Case 8-3: Sondra Fox
Teaching Note
Case Synopsis
Sondra Fox, supply chain manager at Covington Meters (Covington) in Cincinnati, Ohio, had been
ask by the company president, Roy Hoffman, to reduce inventory levels by $1 million, representing
approximately 25%, without compromising Covington’s four week lead time.
Teaching Objectives
Many students will see the focus of this case on the role of the supply chain function in managing
working capital investments. Current inventories at Covington of approximately $4.3 million
represent about 20% of sales. However, an important learning component of the case is the
importance of coordination among the supply chain, operations and sales functions of the
organization.
Topics covered in the case include:

• Cross-functional cooperation and coordination
• Inventory management
• Measuring inventory effectiveness
• Supplier management
• ABC analysis
• Forecasting and planning
Suggested Student Assignment
As Sondra Fox, what is your analysis of the inventory problem at Covington Meters? What action
would you take and why?
Possible Discussion Questions
1. What is a reasonable target for raw material and work-in-progress (WIP) inventory at Covington
today? How about five years from now?
2. How expensive is it to hold inventory?
3. Is Roy Hoffman’s edict to cut inventories by $1 million reasonable? Where do you think he came
up with this number?
4. How profitable is Covington?
5. How does Covington compete in the market today? How will it compete five years from now?
130 Chapter 8
Analysis
Although Covington manufactures 14 products, it essentially provides a custom-made product with

each order. Each product was available in metric and imperial units and there were eight options for
measuring gas flow, which represents 224 different stock keeping units (SKUs) (e.g., 2 ×14 × 8 =
224). In addition, customers could also specify a broad range of accessories, which effectively
increased the number of SKUs into the thousands.
Covington competes on service for now, but will compete on price in the future as it moves towards
long term supply agreements with its customers. Once the product and customer mix shifts to long
term customer commitments, scheduling and planning will become easier. However, it is unlikely
that the service/fast response part of the business will disappear. As a result, Covington will continue
to compete in two segments: 1) short lead times with higher margins, and 2) long-term contracts
where customers use price as a major criterion in supplier selection.
Current Volumes and Profitability
There is enough data in the case to estimate Covington’s production volumes and profitability.
Average meter cost is about $1,200. At $20 million in sales, the company produces about 16,000
meters per year or roughly 1,333 per month, 333 per week and 67 per day.
It is worth spending time in class to make sure that the students understand the manufacturing
process. The case indicates there were five departments in the plant: machining, painting and
anodizing, subassembly, final assembly and testing and proving. Machining is likely the bottleneck,
requiring significant investments in five computer numeric control (CNC) lathes and two CNC
grinders. Each machine had a replacement cost of approximately $1 million. In contrast, the
subassembly and assembly operations were worker-paced with nominal capital investment required.
The testing and proving area required specialized equipment, albeit not very expensive, which
needed to be certified on regular schedule.
The case indicates that labor utilization rates were 85%, which is very high for an operation that is
essentially a job shop. This is one clue as to why inventories, in particular WIP, are high. If the
priority on the plant floor is to keep the workers busy, the supervisors could be manufacturing
components that are not for a customer order. In effect, they could be building WIP inventory
without prospects of using the subassemblies in finished product in the near future. In the context of
the Theory of Constraints2, Covington is increasing inventories and operational expenses without
increasing throughput. In the quote at the end of the case, Sondra indicates that Covington has $1.4
million in slow moving raw and WIP inventory, due in part to supplier minimum order quantities
that often exceed customer order quantities by a significant amount. Converting slow moving raw
material inventory into WIP only exacerbates the problem.
There is also sufficient information in the case to estimate Covington’s cost structure. As shown in
Exhibit TN-1, this is a very profitable business, with net profit of approximately $1.9 million (9% of
sales) and earnings before interest, taxes, depreciation and amortization (EBITDA) of $5.5 million
(27% of sales). Freeing up working capital by reducing inventories can be used to pay down debt or
2
See: The Goal, by Goldratt and Cox, 3rd ed.
to invest in projects to reduce manufacturing costs. As previously stated, as the company grows
through acquisition of long-term contracts, margins will likely get squeezed. However, the prospects
look promising provided Covington can keeps its cost structure in line.
Inventory turns is one measure of effectiveness in managing inventory. It is calculated by dividing

annual dollar sales volume at cost by average dollar inventory investment. According to the data
from the case in Exhibits 1 and 2, inventories were approximately $4.3 million (raw = $1.8 million;
WIP = $2.3 million; and, FGI = $200,000). Using the cost of goods sold (CGS) data from Exhibit
TN-1 the inventory turns at Covington are: $10 million/$4.3 million = 2.3 times. Reducing
inventories by $1 million would increase turns to $10 million/$3.3 million = 3.0 times.
A 30% increase in sales expected for the following year, as indicated by Roy Hoffman, will increase
revenues to approximately $26 million. This is very close to the capacity of the plant, which Sondra
estimates to be $28 to $30 million. Assuming the same margin, CGS at $26 million in sales is $13
million. If inventories are maintained at the current level, turns would increase next year to $13
million/$4.3 million = 3.0 times. The combination of higher sales and a $1 million reduction in
inventory would yield inventory turns of $13 million/$3.3 million = 3.9 turns, a significant
improvement from the current level of 2.3 times.
Potential Alternatives
Of course the best way to reduce inventories is to stop buying raw material. However, Sondra needs
a thoughtful plan to make sure the right materials, are available at the right time, in the right quantity
and quality, at the right price. Several avenues need to be explored. Controlling the flow of raw
material and production is a good first step. The case indicates that production scheduling was
handled Connie Linn in Gino Ricci’s group. A closer look at the production scheduling policies is
needed to make sure that excess inventory is not be produced as a result of a focus on labor
efficiencies (e.g., converting raw material to WIP without a customer order).
Ideally a pull system could be implemented so the only customer orders trigger production. The
difficulty is that for rush orders long supplier lead times make it impossible to react to the four week
customer delivery time. Sondra should explore opportunities for strategic positioning of inventory in
the supply chain, reducing supplier lead times and negotiating vendor managed inventory
arrangements with suppliers.
Strategic positioning of inventory includes delaying differentiation of subassemblies until customer

orders are received. It would appear the major components of a meter are the machined body, the
module for the counter and/or electronics and the accessories. The plant could, for example, build to
stock for the bodies, modules and accessories and then assemble to order for the finished products.
Evaluating opportunities to change inventory strategy could also include the manufacturing strategy
and specifically what is assembled at Covington versus outsourcing. Prime examples are electronic
and counter modules. Electronic component assemblies could be outsourced to printed circuit board
(PCB) supplier. This would reduce inventory complexity by placing responsibility with the supplier
to order and manage subcomponents. A competent PCB supplier could likely provide lower total
132 Chapter 8
costs, with equal or better quality. The previous owner likely preferred to produce most components
in-house. An opportunity likely exists to challenge this approach.
Reducing supplier lead times requires spend analysis to identify key suppliers and components.
Exhibits TN-2 and TN-3 uses the data for the exhibits in the case to establish costs per unit and SKU
for raw material and WIP inventories. Five raw material categories (electronics, castings, hardware,
plastic parts and counter assemblies) account for nearly 80% of the raw material inventory. Although
castings have the highest average cost per unit ($10.81), each of the five categories included a large
number of SKUs. For example, the case mentions that the 444 electronics SKUs raw material ranged
in value from pennies to more than $100. ABC analysis would identify the approximately 80 to 90
SKUs that likely account for $400,000 to $450,000 in inventory – or alternatively the approximately
20% of the SKUs that represent approximately 80% of the annual spend.
There is no mention in the case about efforts to set-up vendor managed inventories or projects to
reduce supplier lead times. Sondra should be sharing forecasts with A category suppliers and
negotiating agreements where they held inventory of commonly used/high volume parts. Suppliers
might expect to be compensated through higher prices, but the savings in lower inventories would
likely be well worth it. With raw material lead times ranging from six to 12 weeks, this should be a
major area to push for improvements in the supply chain – especially for an organization that
competes on short turnaround times.
Another area of opportunity is examining re-order volumes and safety stock levels set in the ERP
system. It is possible that Alex Dolan is unable or willing to exercise judgement when placing orders
with suppliers. The ERP system may be creating part of the problem by keeping raw material safety
stock inventories artificially high.
Lastly, raising the profile of the need to improve inventory management will help focus attention of
those involved. Setting targets and tracking progress on a weekly basis will be a constant reminder
of the need to properly manage working capital investments.
The implications from this preliminary analysis are:

• There is still some more digging to do (e.g., investigating production scheduling and safety
stock levels, ABC analysis for raw material and WIP SKUs).
• Opportunities exist to engage A category suppliers to develop plans and proposals that will
simultaneously reduce inventories and shorten lead times.
• Evaluating make or buy options could reduce inventory complexity and costs.
• Current raw and WIP inventory likely include slow moving and obsolete inventory. The
amount of which should be quantified and a plan put in place to dispose of it. This could
include scraping the components or waiting to use them up over the next several years.
• The competitive position of the business is shifting from service to a combination of service
and cost. It is important that Covington’s cost structure remains competitive to support
growth plans.
• Company sales are increasing by 30% in the following year, pushing the plant close to its
total capacity. Plans concerning expansion should be addressed very soon.
• The combination of increased sales and a reduction of inventories by $1 million will nearly
double inventory turns. The stress of simultaneously growing the business and shrinking
inventories represents a major management challenge.
These implications indicate a need for several projects and broad engagement of the management
team. Sondra will not be successful without the support of other managers, including Chris and
Gino, but especially Roy.
Addressing the Slow Moving Inventory
The options described above address issues related to scheduling, planning, inventory control and
supplier management and are basic blocking and tackling issues in materials management. However,
addressing the large amount of slow moving inventory will require a different approach. Roy
Hoffman is focused on growing the business and there is apparently little regard for how customer
orders affect costs, including inventory investments. Every order is a customized, and the
expectation is that Covington must protect its four week lead time. In the last two years since the
acquisition, the company has managed to accumulate $1.4 million in slow moving inventory, or
roughly $700,000 per year. That amounts to approximately 40% of company profits ($700,000/$1.8
million) and significantly reduces Covington’s cash flow. A future purchaser of the business –
assuming the approach of the new private equity firm owner is to flip the business once sales get to
$40 million – will discount the value of the business accordingly. Businesses are valued on the basis
of their cash flow, not profits on the income statement.
Addressing this problem will be a tough job. There are two aspects that Sondra needs to tackle:
reducing the current level of $1.4 slow moving inventory, which is about one-third of total
inventory, and reducing (or eliminating) the rate of growth of slow moving inventory. Working
down the slow moving inventory will require some digging into the “salability” of the inventory.
ABC analysis can be used to identify where the big dollar investments are in slow moving inventory.
Sondra will need to work with the Covington engineering and sales staff to target opportunities to
sell this product, likely at a discount.
Addressing further growth of slow moving inventory will be more challenging. It will require greater
product standardization, which also means working with engineering and sales. If customization as a
result of customer orders creates a cost of additional slow moving or obsolete inventory, then
products should be priced accordingly. Addressing this problem will require Roy Hoffman’s
involvement.
What Happened
Roy set-up a taskforce team, chaired by Sondra, and included Gino and Chris to create and monitor
projects designed to reduce inventories. These projects focused on several of the topics identified in
the analysis above. Problems with high safety stock levels and production scheduling were
confirmed. The target was to reduce inventories by $1 million over a six month period. However, as
the inventory reduction initiatives started, the energy sector was hit by a significant drop in the price
of oil and energy companies cut back on their capital spending. As a result the large increase in sales
did not materialize and company sales dropped on a year-over-year basis in the second quarter. As a
134 Chapter 8
result, large amounts of inventory ordered on the expectation that sales would be increasing made is
impossible to achieve the inventory reduction targets. It was not until August that sales started to
recover, albeit to comparable levels to the previous year and inventories started to come down, with
a reduction of approximately $500,000 by the end of August.
Most of the reduction of inventory was targeted to come from the slow moving category. ABC
analysis found that 100 items out of the more than 1,000 slow moving SKUs represented $1.2
million. Sondra worked with engineering and sales to identify opportunities for rework and
substitution of these products for sale to customers.
Other steps taken included:

• Revising (reducing) safety stock levels in the ERP system, which changed reorder points.
• Only firm customer orders were allowed in the production schedule.
• Vendor managed inventory levels were negotiated for major suppliers.
• Production forecasts were shared with suppliers to shorten lead times.
It is notable to point out that Roy Hoffman played a major role in keeping the inventory reduction
project focused and on track. The plan was to have inventories reduced to $3.7 million by the end of
December, with further reductions planned for the following year.
Exhibit TN-1
Covington Cost Structure
Sales $ 20,000,000 case fact

Cost of goods sold (CGS) 10,000,000 50% of sales
Gross margin 10,000,000
SG&A 6,600,000 33% of sales
Interest 1,000,000 case fact
Profit before tax 2,400,000
Tax 600,000 estimate – 25% of PBT
Net income $ 1,800,000
Add back:
Interest $ 1,000,000 case fact
Depreciation 2,000,000 case fact
Taxes 600,000
EBITDA $ 5,400,000
Exhibit TN-2
Raw Material Analysis
Quantity Number of Cost per Cost per

Category Cost ($)
(Number Units) Product SKUs Unit SKU
Bushings and bearings $ 71,030 71,479 14 $ 0.99 $ 5,073.57
Electronics 560,445 1,218,329 444 0.46 1,262.26
Castings 206,063 19,057 43 10.81 4,792.16
Gaskets 52,836 48,603 48 1.09 1,100.75
Gear blanks 31,796 36,833 16 0.86 1,987.25
Hardware 232,681 1,788,617 198 0.13 1,175.16
Machined parts 13,659 6,338 5 2.16 2,731.80
Miscellaneous 31,393 21,944 20 1.43 1,569.65
O rings 7,821 119,849 31 0.07 252.29
Plastic parts 183,558 876,104 41 0.21 4,477.02
Plates 75,980 59,339 188 1.28 404.15
Shafts 58,939 56,191 26 1.05 2,266.88
Steel and aluminum 57,540 294,332 52 0.20 1,106.54
Counter subassemblies 204,032 442,538 79 0.46 2,582.68
Total $ 1,787,773 5,059,553 1,205 $ 0.35 $ 1,483.63
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THE LOSS OF THE SHIP PERUVIAN
Over the North Atlantic ocean and the coast of Cape Cod on the
night of the 26th of December, 1873, swept a gale and storm so
fierce and wild that even dwellers of the coast were surprised.
With almost hurricane force the wind-driven sea rushed in
mountainous waves towards the outlying sand bar and hurled
themselves with a terrific roar on the sands of the beach.
Many weeks before from the smooth waters of the harbor of
Calcutta the American ship Peruvian had passed out into the deep
sea and with a blue sky and favoring breeze had spread her white
sails and headed for home on her long voyage.
Beneath her decks was stored a valuable cargo of sugar and
block tin and Boston was her destination.
The ship was in command of Captain Charles H. Vannah. And
she carried a crew of 24 men. With such a bright departure they
were anticipating a quick and safe voyage. All had gone well with
ship and crew until this fateful December morning. All day long the
snow had fallen thick and fast, driven over the deck of the ship and
through her rigging by the ever increasing gale. Riotous waves lifted
the big ship to their crests only to plunge her the next moment into
the depths of the deep hollows as they tore madly away in the
approaching darkness.
Captain Vannah had been unable for 24 hours to obtain an
observation, but he knew that his ship was approaching the coast of
Cape Cod. Hoping every moment that some slight abatement in the
storm might give him a chance to pick up some outlying beacon or
the glimmer of some friendly lighthouse he kept the ship’s head to
the north with all the sail upon the spars that they could stand
without breaking. Higher and stronger ran the seas, wilder and more
terrific blew the gale, often across the ship’s decks swept the huge
waves, while all about them the dark skies lowered and the angry
waters swirled when suddenly, just before midnight with a terrible
plunge and an awful crash the ship struck the sand bars of the
dreaded Peaked Hill Shoals, nearly a mile from shore; then utter
confusion reigned on the ship. Up to that time only occasional seas
had swept her decks; now the huge waves in torrents constantly
swept her and pounded unceasingly her breaking decks. Boats, deck
fittings and everything movable was swept away in the darkness and
the turbulent sea; her crew driven to the rigging found there only a
temporary place of escape; soon came a mountain-like wave,
overtopping all those which had preceded it and thundered over the
doomed ship, tearing away all of her masts and portions of her deck,
hurling the entire ship’s crew into this mass of thrashing wreckage
and churning sea, and their last sad cries were hushed in the mad
seas that covered them.
With the first glimmer of approaching daylight men hurried to the
outer beach, believing that some terrible disaster had occurred. They
found the shore for miles covered with portions of the cargo and
many broken timbers of the lost ship, but owing to the distance from
shore to where the ship went down only three bodies were ever
recovered and those only after many days of washing about in the
surf.
Out there across yonder bar, where you see the waters curl and
break into a ripple, forming a white line against the blue of the sea
beyond, lies the sunken and sea-washed hull of the once stately
ship; in that sparless hull and the rotting and sand covered timbers
you cannot recognize the majestic vessel that only a few short years
ago sat out there in all her splendor and with her strong sides
seemed to defy the elements.
That blue water, so quiet now, and breaking with such gentle
ripples on the shore, does not give you the impression, that in a few
hours with a change of wind, it could be lashed into fury, and with
towering foam capped waves dash upon the beach with the roar of a
Niagara.
The storm is o’er and all along the sandy reach,
The shining wavelets ripple on the lonely beach,
Beneath the storm-washed sands and waves of blue,
There rests unclaimed, the members of the lost ship’s crew.
Captain Vannah had been a seafaring man all his life. In a pretty
little town, nestling among the granite hills of New Hampshire, he
had known and loved a dear young girl; for several years they had
planned that when his sea voyages were ended he would come to
claim his bride and would sail the seas no more. He had secured a
fair competency and had promised her that this would be his last
voyage. He wrote to her when his ship sailed out of that far eastern
port, advising her of the probable date of his arrival at Boston. She
had made all arrangements to go down to the city and meet him
when his ship should be reported as approaching the harbor.
She daily scanned the ship news columns of the papers, and on
this December morning she knew his ship must be nearing port, but
in her sheltered home she did not realize what a terrible storm was
sweeping the coast.
Only those who have been suddenly overwhelmed with a
paralyzing blow can appreciate what, with ruined hopes, this young
girl felt, when she opened the daily paper only to read in great black,
cruel headlines these words, “Ship Peruvian goes down off Cape
Cod, and all hands are lost.”
HIGHLAND LIGHT, CLIFFS AND BEACH, NORTH TRURO
BARK FRANCIS
The same storm that carried the Peruvian and her whole ship’s
company to destruction drove the North German Bark Francis to the
same fate only three miles farther down the coast, but though sad
enough in some of its features this disaster was not attended with
the appalling loss of life that accompanied the loss of the Peruvian.
These two vessels sailed from the same port in Calcutta only a
few days apart, and had almost been in sight of each other during
the long voyage.
The Peruvian was so unfortunate as to become involved in the
shallows of Peaked Hill Bars, while the Francis, in the deeper waters
to the south was driven by wind and sea over the outer line of bars
and finally grounded within two hundred yards of the beach; her hull
was of iron and she soon settled firmly into the sand.
Every avenue of approach to the beach was blocked with snow,
huge drifts covering every highway and hollow. There were no
mortar guns and no life saving crews then, and no boats of any kind
on the outer beach available. At the shore on the bay side of the
cape was a whale boat, a boat sharp at both ends and about
eighteen feet in length; this boat might afford possibly safe means of
reaching the imperilled crew on the ship, but to get it to the scene of
the wreck was a problem. Finally, through the united exertions of
twenty strong men, the boat was drawn to the edge of the pond in
the village of North Truro, then dragged over the frozen surface of
the pond to the highway near the Post Office, where a pair of horses
was attached to wheels, the boat mounted on them and the journey
to the outer beach and possible rescue was fairly begun; when snow
drifts were not too deep horses and men hurried the boat along;
when great drifts were encountered shovels were brought into use
and a way broken for the horses; then on again, ever in the face of
the storm swept moors towards the ocean, across the gale swept
hills and snow covered valleys the party struggled, until finally, at ten
o’clock in the forenoon, almost exhausted, they reached a point on
the beach opposite the wreck.
A volunteer crew manned the boat, willing hands helped to push
the boat through the foam covered surf, the men bent to the oars
and the trip to the side of the bark was made in safety.
Captain Kortling, of the bark, had been ill in his cabin for many
days and it was with no little difficulty that he was finally lowered
helpless into the rocking and pitching boat, which the thrashing sea
threatened every moment to dash to pieces against the iron sides of
the ship. Brought to the beach and landed, Captain Kortling was
taken in a farm wagon and hurried to the Highland House.
Weakened by disease and worn out by the terrible exposure of the
wreck and the storm, he lived but four days after reaching shore, and
his remains lie buried in the Old Cemetery on the hill, near the west
entrance. The other members of the crew, twenty in number, were
rescued without mishap.
In a few days tugs and lighters were brought to the scene of the
wreck and the work of attempting to save the cargo was begun. A
large part of her cargo was sugar in great straw mats; these in the
process of hoisting out of the hold of the vessel frequently became
broken and the sugar sifted out upon the deck; some twenty-five
men were required to assist in this work of hoisting out the cargo and
placing it upon the lighters. As it was not practicable for these men to
go ashore at noontime they were obliged to take their dinners with
them to the ship; generally a small pail or basket sufficed for carrying
the noon meal. When these men left their work at night the overseer
in charge of the work of unloading would tell the workmen that they
might fill their lunch baskets with the loose sugar which had sifted
out of the broken mats and take it home. In the beginning their pails
as a rule held two or three quarts, but when it became known that
the dinner pails could be filled each night on leaving the ship the size
of these lunch pails and baskets increased amazingly, from a
receptacle with a three quart capacity they soon rose to twenty-five
and even fifty pounds capacity, so that the boat in her last trip to the
shore was in danger of being swamped with the great weight of
lunch baskets. This abuse of a privilege resulted in the cutting off the
supply, although many workmen had already secured a year’s
supply of sugar for their families when the shut off edict was issued.
This vessel seemed to offer the wreckers a good proposition as
an investment and a company was formed with the purpose of
making an attempt to raise and float the vessel. They purchased her
of the Insurance Companies into whose hands the ship had fallen;
then they spent hundreds of dollars in trying to get her from the sand
bar; finally after many weeks of preparation everything seemed
ready, a powerful tug was engaged to stand by and be ready to pull
the ship away as soon as she floated, big steam pumps were
installed on board and all was expectancy; then after a full day’s
steady pumping by the great pumps on her deck, suddenly the big
ship stirred in her bed and rose to the surface with a bound; then a
great shout went up from the assembled crowd on the beach and
from the interested investors on the bark’s deck when they believed
their venture was about to be crowned with success, but this quickly
turned to dismay when the ship, as suddenly as she had come to the
surface, sank back again beneath the sea, from which place she
never moved again, and the shifting sands soon covered her.
The rocking of the ship by the waves and the storms that beat
over her on the sand and coarse gravel of the bed of the sea had
worn holes through her iron sides where her masts were stepped
into her keel, and immediately the ship rose from the bottom a great
torrent of water poured in through these openings, flooded the entire
ship again and carried her back into the sandy bed where she had
so long reposed. For many years in the ever changing sands the
jagged sides of her ever diminishing hull would be exposed only to
be buried by the next great storm that swept her.
LOSS OF THE GIOVANNI
A northeast gale and furious snow storm was sweeping the
coast of Cape Cod and hiding the great sea in its smother all through
the day of March 4th, 1875. Late in the afternoon, during a
momentary breaking away of the storm filled clouds, a great vessel
was discovered fast upon the outer sand bar nearly three miles north
of Highland Life Saving Station. It proved to be the Italian bark
Giovanni, Captain Ferri, from Palermo for Boston, with a cargo of
sumac, nuts and brimstone; her sails were blown away, her rudder
broken. She was in a position to be pounded to pieces before
another sunrise; her crew was almost helpless from exposure to the
cold storm. The crews of Life Saving Stations 6 and 7 were promptly
at the scene of the wreck, but owing to the snow bound conditions of
the roads and the almost impassable state of the beach, added to
the great distance from the Life Saving Stations, it was a task almost
beyond the power of human endurance to get their boats and beach
apparatus to the shore opposite the scene of the disaster, but as
soon as the position of the vessel was clearly determined, and it was
recognized what kind of gear was necessary in order to aid the men
in the ship, they hurried to their stations, and after hours of almost
superhuman exertions, dragging their beach carts, mortar guns and
apparatus through heavy snow drifts that had to be broken out
before they could proceed. Over sand hills swept bare by the driving
gale, through meadow bogs and brush covered ridges, they finally
reached the beach in the vicinity of the wreck. No attempt was made
to launch the life boat, as such an effort, in the face of all the terrible
conditions that prevailed, the awful sea and the distance of the
vessel from shore, would have been foolhardy in the extreme, and
would only have added to the death roll the lives of the life-savers,
without accomplishing the saving of a single life.
The mortar gun, however, was made ready with all possible
dispatch, though it was recognized from the first that no gun could
carry a line that distance in the face of such a terrific gale. But the
gun was charged, the charge exploded and out over the foam
covered sea the shot line sped, only to fall spent in the wild sea more
than a hundred yards short of the ship. The uselessness of further
attempts along these lines was apparent, but the life savers again
made ready with another line, hoping that the pounding sea would
with the rising tide force the bark over the sand bar and nearer the
shore. But it now became evident that the ship was so firmly impaled
upon the treacherous shoal that there was no hope of her being
moved by sea or tide, and in fact it was but a short time later that
there came to the shore evidence that the vessel was beginning to
break up, as portions of her upper works and even some portion of
her cargo could be seen between shore and wreck and was being
driven shoreward by the savage seas that broke in fury over the
sand bars. Just then two men were seen to leap from the deck
house on the after part of the ship, into the roaring torrent that raged
about them; for a moment they were lost to sight in the suds of the
churned up sea, then as they appeared upon the surface they were
seen to seize upon pieces of wreckage that floated near them; to
these they clung desperately, at one moment buried from sight in the
salt spume, the next moment rising to the top of a foam crested
wave rushing onward and almost wrenching the plank to which they
clung from their grasp; when more than two-thirds of the distance
from wreck to shore had been covered the wreckage which had
borne one of the sailors appeared upon the top of an oncoming
wave, but there was no human form clinging to it; nature had made
its last long struggle and the poor fellow had released his grasp and
dropped helpless into the wild sea that covered him forever.
The other man still retained his hold upon the frail support that
bore him shoreward; now it was a question of only minutes, would
his strength stay by him, could he hold on a moment longer, should
his rapidly waning strength desert him now and his grasp relax he
would be swallowed up in the sea instantly and no power could save
him. Men rushed to the edge of the tide, even into the surf, grasping
hands as a living rope; on came man and wreckage, as the broken
water smashed down upon the sands strong hands reached out and
seized the sailor before the relentless undertow could draw him back
into its cruel grip. He was saved, but he was the only one of the
whole ship’s company of fifteen men.
Night shut in but we kindled a huge bonfire on the beach and
patrolled the shore up and down all night, hoping that some other
unfortunate might be brought in with the tide. Long before daybreak
the shore for miles was strewn with flotsam and jetsam from the
wreck which was being constantly rended by the sea; bags of
sumac, bags of nuts and even casks of wine mingled and washed
together in the surf, but not a human body, alive or dead, was cast
up by the sea. Every watcher on the beach believed that the ship
had been entirely broken up, and that every person on board had
perished. Still we lingered awaiting the coming of the sunlight; when
it did come and objects were visible for any distance, what was our
surprise to see the after deck house of the bark still in place, and a
portion of her bow and the stump of her broken foremast still
standing; the huge waves were still smashing over her furiously. If
we had been surprised at seeing any portion of the hull still standing
above the water, we were dumbfounded when we saw a man jump
from the bow near the broken foremast and swim through the fiercely
raging waters to the after deck house, and in the face of the
pounding sea that beat upon him, climb under a sheltering piece of
the cabin that had not been torn away.
That a human being could live through such a night as that, in
that icy water and retain his hold upon any part of those ice covered
timbers and sea swept wreck seemed incredible. But the chapter of
horrors was not yet complete in this wretched disaster. Piece by
piece the sea tore away what remained of the wreck until nothing but
the deck house roof remained above the sea; as wave after wave
hurled itself against the battered top it was seen to lift from its
fastenings that held it to the submerged wreck and the next wave
bore it off far into the thrashing sea. Then we saw, clinging to the few
remaining pieces of the frame of the deck house, with a death grasp,
four members of the ship’s company, but endurance had reached its
limits and they were quickly swept from the last possible thing to
which they could cling, and though they made a last heroic effort to
seize some piece of wreckage, two of them did succeed in grasping
some floating object and were carried for a considerable distance
towards the shore, but their long and terrible exposure had so
exhausted and chilled them that they could make no further exertion
and the mad sea claimed them.
Some adverse criticism was directed against the men of the Life
Saving corps, for their failure to rescue these sailors, but it was
wholly unmerited as the Life Savers did everything in their power or
that it was possible to do under the circumstances.
It was one of those terrible marine disasters, of which there are
many, where man is a plaything in the grip of the sea when the storm
king is abroad in his might.
THE JASON
Late in the afternoon of December 5th, 1893, the patrol of the
coast guard of Life Savers of Nauset Beach, a few miles south of
Highland Light, during a momentary break in the furious storm driven
snow, saw the outlines of a great ship, not more than two miles from
the beach, heading towards the Port of Boston under close reefed
lower topsails, struggling with the grasp of giant waves which
threatened every moment to overwhelm her. Soon again the
increasing gale hid all the turbulent waters of the great sea. The
winter night came on with rapid pace. All along the shore each Life
Saving crew had been warned by telephone to watch with increased
vigilance for a disaster which their experience had taught them was
inevitable. Not a coast guardsman slept that night. All the boats and
beach apparatus were made ready for instant use; the patrol
watches were doubled; the men at their stations stood ready
dressed, anxious, dreading but ever watchful and ready for the call
which they expected to come at any moment.
At 7.15 a surfman of the Pamet River station rushed breathlessly
and excitedly into the station and shouted, “She is ashore, half a mile
north of this station.” All the stations were immediately notified. Then
out into the storm and darkness and the blinding snow, along the
gale swept beach where the flying sand cut their faces like knives,
toiling through the yielding sand with their mortar guns and boats,
hoping to reach the scene of the disaster ere it was too late, the Life
Savers hurried. Chips and logs along the shore were gathered
together and a huge bonfire kindled that those on the ship might
know that every human effort was being exerted to aid them. By the
glare of the light on the shore away over there in the awful night the
faint outlines of the doomed ship could be seen, her great white sails
being torn to shreds by the savage fury of the winter storm. Great
torrents of gale driven sea swept her decks every moment. Her
broken masts fell with a crash to her decks. Soon her iron hull was
twisted and wrenched asunder; through her rended decks and
battered sides floated portions of her cargo to the shore. The cries of
her drowning sailors could be heard above the fury of the storm. The
mortar gun of the Life Savers thundered again and again. The shots
sped true to their mark and the life lines fell across the ship’s hull,
but her men could not reach them, so madly rushed the waters
between. Soon a surfman saw a dark object thrown up by the sea; it
was a human being. He was quickly taken up by willing hands and
hurried to the station, restoratives were applied and soon he was
able to tell the story of the wreck:
“Our vessel was the British ship Jason, Capt. McMillan. We were
on a voyage from the East Indies to Boston with jute bales. We did
not know our position until we saw the land at four this afternoon. We
tried, by crowding every sail upon the ship, to weather Cape Cod; we
failed. There were 27 officers and men in our ship’s company. I am
the only one that lives; I saw all my shipmates perish when the
mizzenmast fell.”
WRECK OF THE JASON
Like many another shipwreck the irony of fate pursued this ship’s
company, when her keel was driven into the sand bar by the force of
the mighty waves which hurled her forward, the only spot upon the
whole ship which seemed to offer a place of refuge from the boiling
surf which tore across her deck was the mizzenmast. Into the rigging
of this spar every man hurried except the one man who was saved.
He was swept from the rail before he could gain a foothold with his
shipmates; but what they had hoped would be their haven of safety
was their doom. Scarcely had they climbed above the maelstrom of
rushing waters when the mast went down with a crash into the sea,
killing many of the sailors in its fall and drowning the others in the
wreckage. The foremast stood unmoved by the winter’s storms for
many weeks. Could this unfortunate crew have reached this portion
of the ship many of them would have been rescued on the following
day.
Out there today when the tide is low, protruding through the
sands of the bar and the white caps that wash them, are the broken
fragments of the sunken ship looking like tombstones in the village
churchyard. All along the shores of this wind swept and sea washed
coast those half submerged and silent sentinels remind us that up
and down this sandy reach the ever moving sea has covered
hundreds of those heroic men who have gone down in ships on the
great sea.
LOSS OF THE STEAMSHIP
PORTLAND
Among all the terrible disasters which have made the dreaded
shores of Cape Cod known to mariners the world over, probably the
worst of all was the loss of the steamer Portland, which sailed from her
pier in Boston, on the evening of November 26th, 1898, on one of her
regular trips to Portland, Maine, and before midnight of the following
day her broken timbers, cabin fittings, large quantities of cargo and
dead bodies lined the outer shores of Cape Cod, from Highland Light
to Chatham. Not a person of her 175 passengers and crew survived
the disaster.
The awful hurricane which swept the coast of New England that
fateful Saturday night and Sunday was the worst in the memory of
living men; the wind attained a velocity of approximately one hundred
miles an hour.
When the Portland steamed out of Boston Harbor on that eventful
Saturday night her captain did not anticipate that the storm would be
more severe than the ordinary winter gale. She ran quickly down the
smooth waters of the harbor, out by Boston Light, the gale increasing
every moment. She passed Thatcher’s Island and on towards Cape
Ann; she could have made Gloucester Harbor, but her master hoped
the storm had reached its worst; not so, for every moment it grew more
furious; the lights along the coast, one after another, were now blotted
out by the ever thickening snow, the great seas ran riot in the bay. Now
it was too late to turn back; the ship plunged into the wild seas that
rose like mountains before her. To have attempted to turn the ship
about with her high superstructure when she would have fallen off into
the trough of the sea would mean her speedy destruction. On she
staggered in the inky darkness of the wretched night until the fury of
the gale and sea checked her further progress; then their only hope lay
in being able to keep the ship’s head towards the wind. All through the
long night and far into the next day, Sunday, the ship reared and
plunged in the mad sea, slowly but surely every hour being carried
nearer the lee shore of Cape Cod, drifting helplessly but ever with her
bow to the sea. At 4 o’clock on the afternoon of Sunday the Life
Savers at Race Point Station heard two distinct blasts of a steamer’s
whistle, sharp and piercing; at 10 o’clock that night the patrolmen from
stations south of Race Point came upon great masses of broken
beams, deck-houses, furniture, boxes and barrels of freight and
several dead bodies.
It is believed by men on the coast familiar with storms and tides
that the whistle heard by the Race Point Life Savers at 4 o’clock was
the last despairing cry sent up by the doomed ship before the sea
engulfed her and those on board, and that between that hour and 7
o’clock that night the ship’s total destruction was accomplished.
It is no doubt a fact that the ship was held to her course until
suddenly her steering gear was torn away by some huge sea more
vicious than those before, she immediately fell off into the trough of the
sea, and amid the crash of broken timbers and the thunder of the awful
sea the ship went down with all on board.
There has been much speculation and prolonged search by the
government and others to determine if possible approximately where
this ship was swallowed up in the sea; the location of this terrible
disaster has never been satisfactorily determined, but there is no
question in the minds of sea coast men but that this ship went down
somewhere between 8 and 12 miles north of Highland Light.
Out of the entire company of passengers and crew which went
down with the ship only 60 bodies were recovered. Some of those
found were fully dressed with life preservers upon them, indicating that
the wearers knew that their chances for life were slight indeed. Other
bodies were entirely nude when recovered, showing that some of the
passengers had evidently retired to their staterooms in the earlier
hours of the voyage and were made so ill by the terrible pitching and
rolling that they made no exertion to dress themselves before the ship
went down.
It is believed that no less than 500 human lives were the sea’s
death toll in this awful hurricane that swept the shores of Cape Cod
and Massachusetts Bay in that frightful storm.
This disaster will pass into the annals of Cape Cod’s shipwreck
history as the one which concerned the greatest loss of life from a
single vessel.
The fury of such a gale can hardly be understood or appreciated
by any one not having had personal experience with sea coast storms.
As far as the eye could reach on that Sunday morning over the wild
sea not the least bit of blue water could be seen for a distance of two
miles from the shore; the whole ocean was a mass of seething foam;
this driven shoreward by the gale would be caught from the beach by
the wind and blown skyward high over the towering bluffs, then swept
inland and break like bursting soap bubbles in the fields hundreds of
yards away.
x( Where wreckage first landed from S.S. Portland Sunday
night.
P Place five miles N. E. of High Head Life Saving Station,
where it is thought by all coast men the Portland went down.
Such was the force of this hurricane of wind that every window
pane on the ocean side of our house (the Signal Station at Highland
Light) was blown in and smashed into a thousand fragments. Men
exposed to the full force of the storm were blown from their feet and
hurled about like blocks of wood.
Men of the Life Saving service were exhausted by their exertions in
trying to cover their beats, and several of them were completely
unnerved by their frequent trying experiences in dragging torn and
sea-washed bodies from the surf. There were cases where some of
the men of this service were made almost nervous wrecks by their
almost nightly contact with the disfigured and unfortunate victims
thrown up to their feet by the sea.
Destruction widespread on land and sea was the result of this
fearful storm.
Never had its like been seen before.
* * * * *
My daughter for a number of years was my assistant and the
following story, which originally appeared in the New York World, may
be of interest in this connection:

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Quantity and Inventory

Quantity and Timing Issues The Forms of Inventory

Case 8-1: Lisa Caruso

What should be done about the stockroom operations and Morrison?

SUGGESTED STUDENT ASSIGNMENT

POSSIBLE DISCUSSION QUESTIONS

1. What are the key success factors for Morrison?

The company produced a high-quality, well-engineered product, presumably at a competitive price.

Category Percent Percent # Items Annual Purchases/ Average Average

1. More stockroom clerks

2. Elimination of the Stockroom

3. Partial Decentralization of the Stockroom

Case 8-2: Throsel-Teskey Drilling

Prepare a plan for the CEO to reduce inventories.

SUGGESTED STUDENT ASSIGNMENT

POSSIBLE DISCUSSION QUESTIONS

1. Do you think that the budget is reasonable?

Inventory Inventory Actual % Sales - % Sales - Sales Inventory

Inventory Inventory Actual % Sales - % Sales - Sales Inventory

Possible Reasons for Inventory Problems

6) Costs of drilling supplies have increased substantially.

• Aboveground drilling, within 4-hour drive from Phoenix

Inventory at Mine Sites

Inventory Control at Phoenix Warehouse and Accurate Inventory Data

Vendor Managed Inventory (VMI) Arrangements

Setting Inventory Targets

% Suppliers % $ Spend # Suppliers $ Spend

Case 8-3: Sondra Fox

Topics covered in the case include:

Suggested Student Assignment

Possible Discussion Questions

Although Covington manufactures 14 products, it essentially provides a custom-made product with

Current Volumes and Profitability

Inventory turns is one measure of effectiveness in managing inventory. It is calculated by dividing

Strategic positioning of inventory includes delaying differentiation of subassemblies until customer

The implications from this preliminary analysis are:

Addressing the Slow Moving Inventory

Other steps taken included:

Sales $ 20,000,000 case fact

Quantity Number of Cost per Cost per

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