MID-TERM EXAM

SUPPLY CHAIN INVENTORY MANAGEMENT

PLEASE E-MAIL YOUR ANSWERS TO ME AT swaimtony@hotmail.com by MARCH 21.

1. Jones Company has 5,000 items in inventory. An analysis shows that 500 are A
items, 1,750 are B items, and 2,750 are C items. A items are counted every 20
working days, B every 60 working days, and C every 120 working days. The
company wants to hire a cycle counter. On average, how many items will be
counted each day? Please make sure to show your calculations for full credit.

Class A items: 500 items counted every 20 days.

 365/20=18.25 times a year this class will be counted.
 500*18.25=9125
Class B Items: 1750 counted every 60 days
 365/60=6.083 times a year this class will be counted.
 1750*6.083=10645.25
Class C Items: 2750 items counted every 120 days.
 365/120=3.042 times a year this class will be counted.
 2750*3.042=8365.50
So then I will add up all the totals for each class.
 9125+10645.25+8365.50=28135.75 items counted in a year.
And divide by the total number of days in a year (assuming 365)
 28135.75/365=77.08 Which means 77 items counted each day
Or if we are considering just working days, which is usually 260. (I am taking an average, not
including leap years and when years start on weekend, etc.)
 28135.75/260=108.21 Which means 108 items a day

2. Identify and explain the types of costs that are involved in an inventory system.

The most obvious cost of an inventory system is implementing one. Purchasing of the
software and any additional hardware required also the cost of installing and maintaining all
equipment. But there are also numerous ongoing costs.
People.
The training, education, and ongoing support to maintain the people who touch and
interact with the inventory system. Ensuring that all employees know and understand the
inventory system and what part they play in maintaining it. Every system needs support to
function properly, and an inventory system is no different.
I am a firm believer in also writing and establishing policies and procedures for inventory
control. Spelling out the expectations of each department and individual who touches inventory.
Restructuring the organization to align with as new system can also be costly. You will also need
to create a solid plan when it comes to who and how the processes are performed.
Processes
How long it takes to complete cycle counts and/or annual inventories, the accounting
costs, and the labor involved with the routine receiving, adjusting, and following up on
discrepancies.
Organization of the warehouse to align with the new procedure is also crucial to
streamline and set the inventory process up for success.
While the total costs of establishing and running an inventory system can be substantially,
the benefits out weight the cost in the ability to manage inventory effectively. Since inventory is
usually the largest asset and the largest cost for a company, dedicating resources to sustain it is
always profitable.

3. What are the advantages of cycle counting?

The benefits of cycle counting are numerous and far reaching in a company. Most obvious is
the cost savings benefit, by avoiding the labor costs in the preparation and execution of an annual
inventory. Also by avoiding the disruption to the business and loss in sales or production when
you need to close for a full inventory count. But there are other benefits that most do not
consider.
Root cause. The biggest advantage I see to a cycle count process over annual inventories is
the ability to quickly identify the root cause of the inventory issues. Only adjusting and fixing
inventory discrepancies puts a short term fix on the long term issue. You will be forever chasing
disappearing or excess inventory if you do not research and discover why it continues to happen.
Having only inventory a few times a year makes it much more difficult to follow the trail and
discover when/why the discrepancies happened, since so much time may have passed since the
error occurred.
High use and critical items can be counted more frequently. Giving you the ability to catch a
discrepancy before it becomes an issue when you are trying to fill or produce an order. This will
improve customer service levels. As a more accurate inventory, leads to customer satisfaction
when the item they wish to purchase is available. Because in the end, it doesn’t matter how
amazing you are with customers if they can never purchase what they desire.
Cycle counting can be done by qualified individuals and not just by all employees, who may
not be qualified to count items, or the worst in my opinion an outside party counters. Less
counting errors occur since item are counted in small lots each day. If we are honest, during an
annual inventory I always try and count the difficult items early in the night, knowing by three
AM most employees’ accuracy begins to diminish.
More awareness of the importance of inventory. I have noticed when inventory is a daily or
weekly act opposed to a less frequent basis, employees know the importance of inventory control
and how valuable it is. This leads to not only hopefully less theft, but also a more conscientious
employees who monitors inventory more accurately.
You can make better decision regarding inventory levels and reorder points. Having a
consistent accurate inventory number enables a company to investigate their reorder points and
reevaluate their safety stock. It also leads to more confidence when using software for auto
replenishment. By allowing the software to work for you, instead of doubting its validity. It is the
old saying of “garbage in, garbage out.”
More confidence with data is system. I cannot tell you how many times I have seen a low on
hand number, such as one, and thought is that true? Or am I out and the inventory is wrong? But
by knowing cycle counts are being done correctly by qualified individuals, I can trust the
numbers on my screen instead of constantly double checking them. This also leads to more
accurate accounting in the system and less of a write off during an annual inventory.

4. What is safety stock? What does safety stock provide safety against?
Safety stock is an extra amount of inventory kept on hand to protect against uncertainty. It is
basically a buffer between fluctuations in supply or demand and out of stocks.
5. Harris Company wants to develop an ABC classification for the following items.
Please help them out.

Item Code Average Inventory Value/unit

89 400 3.75
47 300 4
49 120 2.50
63 75 1.50
94 60 1.75
95 30 2
82 20 1.15
44 12 2.05
10 8 1.8
83 7 2
11 6 3

Item Average Value/unit Extended % of total Class

Inventory Extended
89 400 3.75 1500 44.5 A
47 300 4 1200 35.6 A
49 120 2.5 300 8.9 B
63 75 1.5 112.50 3.3 B
94 60 1.75 105 3.1 B
95 30 2 60 1.8 C
82 20 1.15 23 .68 C
 44 12 2.05 24.60 .73 C
10 8 1.8 14.4 .43 C
83 7 2 14 .42 C
11 6 3 18 .54 C
The total cost of all extended inventory is 3371.50, so I divide the units extended cost by
the total extended costs. A items represent 80.1% of total inventory cost, B items are 15.3%,
and C items are 4.6% of the total inventory costs.
The southeastern Division of LaPlace Power and Light Company is responsible for providing
dependable electric service to customers in and around the area of Metairie, Kenner, Destrehan,
LaPlace, Lutcher, Hammond, Pontchatoula, Amite, and Bogalusa, Louisiana. One material used
extensively to provide this service is the 1/0 AWG aluminum triplex cable, which delivers the
electricity from the distribution pole to the meter loop on the house. The Southeastern Division
Storeroom purchases the cable that this division will use.

For the coming year, this division will need 499,500 feet of this service cable. Because this cable
is used only on routine service work, practically all of it is installed during the 5 normal
workdays. The current cost of this cable is 41.4 cents per foot. Under the present arrangement
with the supplier, the Southeastern Storeroom must take one twelfth of its annual need every
month. This agreement was reached in order to reduce lead time by assuring LaPlace a regular
spot on the supplier’s production schedule.

Without this agreement, the lead time would be about 12 weeks. No quantity discounts are
offered on this cable; however, the supplier requires that a minimum of 15,000 feet be on an
order. The Southeastern Storeroom has the space to store a maximum of 300,000 feet of 1/0
AWG aluminum service cable.

Associated with each shipment are ordering costs of $50, which include all the costs from
making the purchase requisitions to issuing a check for payment. In addition, inventory carrying
costs (including taxes) on all items are considered to be 10% of the purchase price per unit per
year.

Because the company is a government-regulated, investor-owned utility, both the Louisiana

Public Service Commission and its stockholders watch closely how effectively the company,
including inventory management, is managed.

DISCUSSION QUESTIONS

a. Evaluate the effectiveness of the current ordering system.

The current ordering system of 1/12 of their annual needs every month (499500/12=41625 units
a month) represent a total cost of inventory of 86763.75

C(Q/2)= F(D/Q) 4.14(41625/2)+50(499500/41625)=86763.75

C=Carrying cost per unit, per year (4.14) Q=Quantity of each order (41625)

D=Demand in units per year (499500) F=Fixed order cost (50)

b. Can the current system be improved?

Even by purchasing the minimum amount from the supplier, inventory costs will go down.

4.14(15000/2)+50(499500/15000)=32,715.00

But the optimal inventory amount can be reached by using the EOQ formula

2 UO
√ hC
U=Annual usage (499500) O=Ordering cost (50)

h=holding cost as percentage of unit cost (10%, so .10) and C=Cost per unit (41.4)

2∗499500∗50
Using the formula √ =3473.50 and rounding up I get 3474
.10∗41.4

Now to figure the total inventory cost

4.14(3474/2)+50(499500/3474)=14,380.29

So by utilizing the EOQ, La Place Power and Light can save

86,763.75-14,380.29=72,383.46 dollars a year

It would be extremely beneficial for them to try and renegotiate their contract to lower
the minimum order, for the most savings. But if the contract cannot be renegotiated, La Place can
still save money by ordering the minimum amount required by the supplier.

86,763.75-32,715.00=54,048.75

Reordering policies will have to be more diligent due to the longer lead times, but with a
little extra effort, but with careful management La Place power can reduce a significate cost each
year.