Inventory Management-

supplies4medics Templates

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supplies4medics: Case Analysis

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 Economic Order Quantities (EOQs) for the A Items.
6. What recommendations would you give to the company?

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 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.
Analysis of Case Data

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Annual Sales Usage value Cumulative usage cumulative % of Classification % of total Cumulative % Inventory Inventory Value Inventory Inventory weeks EOQ Old ROQ
(lat 12 mo ) value sample Usage Value usage value Turns

430 €184,900.00 €184,900.00 5% A 41.33% 41.33% 40 €17,200.00 4.8 26 50

35,400 €123,900.00 €308,800.00 10% A 27.69% 69.02% 8,500 €29,750.00 12.5 2,597 10000
22,500 €31,500.00 €340,300.00 15% A 7.04% 76.06% 10,500 €14,700.00 24.3 3,273 8000
6,000 €21,600.00 €361,900.00 20% A 4.83% 80.89% 1,200 €4,320.00 10.4 1,054 1000
€361,900.00 €65,970.005.49 9.5

268 €21,547.20 €383,447.20 25% B 4.82% 85.70% 6 €482.40 1.2

560 €14,336.00 €397,783.20 30% B 3.20% 88.91% 18 €460.80 1.7
1,250 €12,750.00 €410,533.20 35% B 2.85% 91.76% 172 €1,754.40 7.2
14 €10,570.00 €421,103.20 40% B 2.36% 94.12% 5 €3,775.00 18.6
40 €7,480.00 €428,583.20 45% B 1.67% 95.79% 2 €374.00 2.6
430 €4,859.00 €433,442.20 50% B 1.09% 96.88% 120 €1,356.00 14.5
€71,542.20 €8,202.608.72 6.0

44 €3,916.00 €437,358.20 55% C 0.88% 97.75% 2 €178.00 2.4

3,560 €2,136.00 €439,494.20 60% C 0.48% 98.23% 12 €7.20 0.2
1,260 €1,890.00 €441,384.20 65% C 0.42% 98.65% 0 €0.00 0.0
12 €1,830.00 €443,214.20 70% C 0.41% 99.06% 44 €6,710.00 190.7
140 €1,680.00 €444,894.20 75% C 0.38% 99.44% 24 €288.00 8.9
65 €1,131.00 €446,025.20 80% C 0.25% 99.69% 20 €348.00 16.0
120 €840.00 €446,865.20 85% C 0.19% 99.88% 160 €1,120.00 69.3
220 €242.00 €447,107.20 90% C 0.05% 99.93% 420 €462.00 99.3
100 €240.00 €447,347.20 95% C 0.05% 99.99% 0 €0.00 0.0
10 €62.50 €447,409.70 100% C 0.01% 100.00% 16 €100.00 83.2
€13,967.50 €9,213.201.52 34.3

€447,409.70 1 €83,385.805.37 9.7

Total Inv. value €16,677,160.00

(est.)
Next year €20,846,450.00
Increase €4,169,290.00

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Four ‘A items’ account for 81 per cent of UV.

Six ‘B items’ account for a further 16 per cent of UV.

Ten ‘C items’ account for the remaining 3 per cent of UV.

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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?

These calculations are shown on the Table in question 1, and

to summarize:

A items = 9.5 weeks.

B items = 6.0 weeks.

C items = 34.3 weeks.

Overall = 9.7 weeks.

The stated inventory cover is 10 weeks, in line with the

analysis.
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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?

Its physical and on-line catalogues list just over four thousand items, so the figures in the
sample need scaling up by 4000/20, i.e., 200 times. From the table used in question 1, by
scaling up by a factor of 200, we get:

Total inventory value = Euro 83386 × 200 = Euro 16.68 million.

Annual Holding Cost = Euro 16.68 million × 0.15 = Euro 2.5 million.

This is probably growing at least in line with turnover, by 25 per cent per year, so must be
subjected to tight control. The projected figures for the coming year would be:

Total inventory value = Euro 16.68 million x 1.25 = Euro 20.85 million

Annual Holding Cost = Euro 20.85 million × 0.15 = Euro 3.13 million.

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

Two SKUs are out of stock; both ‘C Items’. In addition the inventory (‘Stock Weeks’)
shown in the last column of the Table in question 1 is less than two weeks for a
further four items, two of which are B Items. Thus there is a significant risk of delivery
failure for around 25 per cent of the items if demand fluctuations occur. Indeed
Pierre Lamouche states that around 500 (of 4000 SKUs) or 12.5 per cent are out of
stock at any time. Pierre gives some of the reasons that he considers to be responsible
for this problem, and the main cause must be failure to update Reorder Levels and
Reorder Quantities in line with changes in demand as the company has grown.
With the multitude of new products, sales forecasts are likely to be inaccurate,
leading to a temptation (or need) to over-order ‘just in case’.

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5. Calculate the EOQs for the A Items.

Notes: Ch = Unit Cost × 0.15

Co = 50 Euro.

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6. What recommendations would you give to the company?

• Conduct ABC analysis at least annually, to keep track of changes in volume.

• C Items can safely be purchased in sufficient quantities to last a considerable period

(say six months). This will reduce the risk ofstock-outs. Two-bin system should be used
to trigger reorders.

• B Items should be subject to more care and more frequent ordering, based on
forecasts where practicable.

• A Items: Reorder levels should be based on EOQ, which is shown in the Table in
question 5. For the first three items in the Table this should be more than adequate to
fund the increased inventory of C Items. These A items should be subject to tight
managerial control, close relationships with suppliers, and accurate frequent
stock-checks.

• Availability levels to be monitored by category and regularly reported to senior

management.

• Maximum inventory levels to be set and monitored.

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