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Inventory Management Case

Neeley Beverage,Inc


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Group members Muhammad ali qazi

Faisal Anees Naeem hussain

Waqar ali

Mudasar


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Sales

0

500

1000

1500

2000

1988 1989 19901991

1992

Sales

Sales


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Perspective

Justine Neeley- Founder

John Williams ProductionManager

1. Feels strongly that base

inventory is excessive2. Wants a quantitative model

for inventory planning3. Is OK with 10% probability

of being out of finishedgoods stock as an

acceptable level

1. Takes pride innot

being out of stockwhen orders arereceived.

2. Prefers never to

have a stock outposition.


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Brief introduction of case Neeley observe some loopholes in inventory management and

decided to go for quantitative analysis for upcoming inventorydecision making process.

He visited management consultants , and theirimportant observations are as follows.

Sales tend to be moderately cyclical betweenquarters two and third and one and fourth.

Neeley product comprise of three lines solely Collegedelight account for 85 percent of total sales.

Management has decided the production plan in

which the production level remains constant

throughout the year.


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Definitions Inventory-A physical resource that a firm

holds in stock with the intent of selling it or

transforming it into a more valuable state.

InventorySystem- A set of policies and

controls that monitors levels of inventory anddetermines what levels should bemaintained, when stock should bereplenished, and how large orders should be


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Inventory Def. - A physical resource that a firm holds in

stock with the intent of selling it or

transforming it into a more valuable state. Raw Materials

Works-in-Process

Finished Goods Maintenance, Repair and Operating (MRO)


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Inventory Positions in the

Supply Chain

Raw

Materials

Works

in

Process

Finished

Goods

Finished

Goods

in Field


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Important inventory management

techniques

The ABC system

The economic order quantityModel.(EOQ)

Just in time(JIT) system

Materials requirement (MRP) system


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Reasons for managing Inventories

Economies of purchasing

Economies of production

Transportation savings Hedge against future

Unplanned shocks (labor strikes, naturaldisasters, surges in demand, etc.)

To maintain independence of supply chain Maximize the level of customer service by avoiding

understocking.

Promote efficiency in production and purchasing byminimizing the cost of providing an adequate level ofcustomer service.


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Inventory Costs Procurement costs

Carrying costs Out-of-stock costs


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Procurement Costs purchase cost or set up cost, this is the

sum of the fixed costs that are incurredeach time an item is ordered

Order processing

Shipping

Handling


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Carrying CostsHolding cost, carrying cost is the cost

associated with having inventory on

hand Inventory risk costs

Space costs

Cost of capital tied up

Storage and handling costs

Insurance

Pro ert taxes 1.0


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Out-of-Stock Costs Lost sales cost

Back-order cost

Loss of sales

Loss of customer goodwill

Disruption of production schedules


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Models for Inventory Management:

EOQ EOQ minimizes the sum of holding and setup

costs

Q = 2DCo/ChD = annual demand

Co = ordering/setup costs

Ch = cost of holding one unit of inventory


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Assumptions of EOQ

1. The ordering cost is constant.

2. The rate of demand is constant

3. The lead time is fixed

4. The purchase price of the item isconstant i.e. no discount is available

5. The replenishment is madeinstantaneously, the whole batch is

delivered at once.


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Total Sale 1993 1860000

College Drink Sales 1581000

Sale Price /6 unit 0.75

Production Cost/6 unit 0.57

70 % Cllegeo Drink sale 1106700

2nd Quarter Sales 553350

3rd Quarter Sales 553350

Remaining Sales 474300

1 st Quarter Sales 237150

4 th Quarter Sales 237150

Sales and inventory projection


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Distribution of containers and margin

no of container 12648000

no of tray 2108000

S P/ 1 container 0.125

no of container/month 1054000

Cents

Selling Price 75

Cost of

Production

Material 30

Labour 18

Container 6

Over Heads 3 57

margin 18


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months

In-house

Cost of

Prod /

pack

Packs

Demand

(D)

Cost of

Productio

n

Insuranc

e costs

(A)

Storage

Costs

(D/15*.1

) (B)

Deprecia

tion

Personn

el Exp

(45467

in 1992)

(D)

Opportu

nity Cost

( 10% ) (

E)

Holding

Cost

(A+B+C+

D+F)

Jan 0.57 1240 707 309 8 117 3324 71 3828

Feb 0.57 1240 707 309 8 117 3324 71 3828

Mar 0.57 1240 707 309 8 117 3324 71 3828

Apr 0.57 2893 1649 721 19 117 3324 165 4345

May 0.57 2893 1649 721 19 117 3324 165 4345

Jun 0.57 2893 1649 721 19 117 3324 165 4345Jul 0.57 2893 1649 721 19 117 3324 165 4345

Aug 0.57 2893 1649 721 19 117 3324 165 4345

Sep 0.57 2893 1649 721 19 117 3324 165 4345

Oct 0.57 1240 707 309 8 117 3324 71 3828

Nov 0.57 1240 707 309 8 117 3324 71 3828

Dec 0.57 1240 707 309 8 117 3324 71 3828

Total 24800 14136 6180 165 1400 39883 1414 49042

Carring cost distribution


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Storage Cost 0.0011Insurance Cost 0.000174

Dep 0.000110689

OPP Cost 0.0095

Personnel cost 0.003594798

Carring Cost / unit 0.014479487

Total Carring Cost 183136.552

Carring cost


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Production Process and Plan

Mixture Container Packing

Time Required (Hours) 7 5 6

Labour Rate 4.75 4.75 4.75

Labour Cost 33.25 23.75 28.5

Cost by Process ($) 48 17 24 89

Order Cost


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Total Cost 378174.2663

Carring Cost % 0.152415653

setup cost 89

2*Setup Cost*Demand 22513440002*Setup Cost*Demand/Holding

Cost 1.55485E+11

EOQ 394315.9472

EOQ


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no of orders 32.075801

inventory

8853600 quarters no of orders

4426800 3rd q 11.226530484426800 2nd q 11.22653048

3794400

1897200 1st q 4.811370206

1897200 4th q 4.811370206

32.07580137

Orders Distribution for Quarters


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100.00 100.00 100.00 100.00 100.00

39.82 40.0052.63 50.00 54.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

InventorySize

Inventory

Sales

Sales VS inventory


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Basic Economic

Order Quantity(EOQ) Model


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Annual Demand D = 24800Setup cost S = 89

Annual carrying cost per unit H = 1Production rate p = 800

Usage rate u = 200

Production days per year D/Y = 240Economic

Run

Quantity Q0 = 2426

Actual Run

Quantity Q = 2400

Increment (Q = 100Number of

runs per

year D/Q =10.333333Cycle time Q/u =23.225806

Run time Q/p = 3Average Inventory Iave = 900

Maximum

Inventory Imax = 1800Annual

carrying

cost Iave * H = 900

Annual

setup cost

(D/Q) * S

=919.66667Total

AnnualCost TC =1819.6667

1,819.67

0

500

1000

1500

2000

2500

3000

3500

0 2000 4000 6000

Run Quantity (Q)

Carrying Cost SetupCost Total Cost

EPQ graphical presentation


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EOQ savingsInventory Cost With Planned Run =

$1201560

Less: Inventory Cost With EOQ Run =$1200470

Inventory CostSavings = $1097


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Suggestions Eoq model is decreasing cost.

Same Sale plan, if it is in size, will suffer

inventory management. Different sales plansfor different quarters are suggested.

Inventory ratio with sales is increasing inprevious years , that need special attention.

Finished goods inventory size is satisfactory,as order time is not so high.

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