Purchasing and Supply Management 15th Edition Johnson Solutions Manual

Purchasing and Supply Management
15th Edition Johnson Solutions Manual

Visit to Download in Full: https://testbankdeal.com/download/purchasing-and-supply-
management-15th-edition-johnson-solutions-manual/
CHAPTER 8
Quantity and Inventory
Topics Covered
Quantity and Timing Issues Inventory Function and Form Framework

Quantity and Delivery
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
Requirements and Resources Planning Dimensions of Services and Quantity
Systems Decisions
Material Requirements Planning (MRP) Conclusion
Capacity Requirements Planning (CRP) Questions for Review and Discussion
Manufacturing Resource Planning (MRP References
II) Cases
Demand Driven MRP Case 8-1 Lisa Caruso
Enterprise Resource Planning (ERP) Case 8-2 Throsel-Teskey Drilling
Systems
Supply Implications of MRP
Functions and Forms of Inventories
The Functions of Inventory
The Forms of Inventory
© 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
123
124 Chapter 8
QUIZ RESPONSES
A 1. Demand for buttons and zippers at a sportswear manufacturer is an example of:
a. derived demand.
b. buffer demand.
c. anticipated demand.
d. independent demand.
a. scheduled demand.
D 2. Which statement is most accurate when thinking about deciding how much to buy:
a. forecasts of future demand, lead times, and prices are usually fairly accurate.
b. the price premium to attain the desired quantity is usually less than the costs of
not having materials available when needed.
c. managers seldom make purchase decisions until they are absolutely sure of the
volume required.
d. balancing price, volume, carrying cost, and the cost of stockouts is key to
successfully determining how much to buy at any point in time.
e. the costs of placing orders and holding inventory are so low they do not
significantly affect the decision of how much to buy.
C 3. The three main inputs of a material requirements planning (MRP) system are:
a. required human resources and machine resources, and available resources.

b. required manufacturing and human resources, and master production schedule.
c. a bill of material, a master production schedule, and the inventory record.
d. Pareto analysis results, inventory records and a master production schedule.
e. inventory records, annual sales forecast, and a master production schedule.
C 4. On an annual requirement of 100 items spread evenly throughout the year, any
purchaser has an opportunity of buying all 100 units at a price of $100 each, or
buying 10 units at a time at a price of $130. If the inventory carrying cost is 20
percent per year and assuming no ordering costs:
a. buying 100 at a time will save the company $3,600 per year.
b. buying 100 at a time will save the company $2,260 per year.
c. buying 100 at a time will save the company $2,130 per year.
d. buying 100 at a time will save the company $1,260 per year.
e. buying 100 at a time will lose the company $840 per year.
QUANTITY AND INVENTORY 125
A 5. When a commercial janitorial service company predicts demand for janitorial

services using commercial building permits issued, office leasing and vacancy
rates, this is an example of:
a. a causal model.
b. a repetitive pattern modeling tool.
c. a time series forecasting technique.
d. a deterministic model.
e. a qualitative forecasting technique.
D 6. Anticipation inventories are carried:
a. to stock the distribution pipelines.

b. to permit activities on either side of a major process.
c. to protect against machine breakdown.
d. to cover a well-defined future need.
e. to protect against uncertainties in supply and demand.
C 7. Managing the consumption of services organizationwide:
a. is easy because organizationwide services spend data is readily accessible.

b. is of little concern because annual spend for services is declining in most
organizations.
c. is difficult because multiple contracts may exist at varying prices and terms
with the same suppliers.
d. is easy because supply management has historically had responsibility for
managing services spend.
e. is easy because forecasting aggregate demand for services is typically more
reliable than forecasting demand for goods.
B 8. “C” items in ABC analysis are:
a. reviewed frequently.
a. ordered frequently.
b. often managed by the supplier.
c. normally carried in small quantities.
d. particularly critical in financial terms.
126 Chapter 8
A 9. Closed-loop MRP:
a. is a system which closes the loop between the supplier and the purchaser.
b. provides a feedback loop between capacity and the master production schedule.
c. requires a feedback loop between purchasing and accounting.
d. requires a check between the master production schedule and inventory.
e. allows a unit manager to sequence jobs done in that department.
B 10. When the carrying cost of inventory is expressed as a percentage:
a. the lower it is, the lower the economic order quantity.

b. it is multiplied by the material unit cost to calculate the per unit carrying cost.
c. it usually exceeds 57.5 percent per year.
d. it must exclude the insurance cost of inventory.
e. it is usually the same as the borrowing cost of the organization.
True and False
T 1. If there were 400 requests for a particular item in a year and 372 were
immediately satisfied, the service coverage would be 372/400 or 93 percent.
T 2. JIT requires frequent deliveries of relatively small quantities in compliance with

quality standards.
F 3. Stockout costs are the same whether it is a seller's market or a buyer's market.
T 4. For the supply management function, time-based strategies that impact

competitive advantage relate to cycle time reductions and greater coordination of
materials and information flows.
T 5. In fixed quantity inventory models, a fixed economic order quantity is ordered

when the reorder point is reached.
T 6. The “bullwhip effect” is a term that refers to the buildup of inventory in a supply
chain.
F 7. In Kanban systems large raw material inventories are necessary.
T 8. MRP II systems link the organization’s planning processes with its financial
system to produce “what if” scenarios to help achieve sales and profitability
projections.
F 9. Supply chain inventory management involves establishing operational design of

the physical flow of goods and services, but does not deal with managing
information flows.
T 10. Any cost associated with having, as opposed to not having, inventory is included
in inventory carrying costs, including (1) capital costs, (2) inventory service
costs, (3) storage space costs, and (4) inventory risk costs.
128 Chapter 8
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.
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
1
In the case the terms “stockroom” and “stores” are used interchangeably.
130 Chapter 8
items 10% in number and 10% in value, and C items 80% in number and 10% in value, the
following emerges:
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.
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
132 Chapter 8
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
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.
134 Chapter 8
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:
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
136 Chapter 8
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).
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.
138 Chapter 8
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
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
140 Chapter 8
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.

Purchasing and Supply Management 15th Edition Johnson Solutions Manual

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Purchasing and Supply Management 15th Edition Johnson Solutions Manual

Uploaded by

Copyright:

Available Formats

Purchasing and Supply Management

15th Edition Johnson Solutions Manual

Quantity and Inventory

Quantity and Timing Issues Inventory Function and Form Framework

A 1. Demand for buttons and zippers at a sportswear manufacturer is an example of:

a. required human resources and machine resources, and available resources.

A 5. When a commercial janitorial service company predicts demand for janitorial

D 6. Anticipation inventories are carried:

a. to stock the distribution pipelines.

C 7. Managing the consumption of services organizationwide:

a. is easy because organizationwide services spend data is readily accessible.

B 8. “C” items in ABC analysis are:

B 10. When the carrying cost of inventory is expressed as a percentage:

a. the lower it is, the lower the economic order quantity.

True and False

T 2. JIT requires frequent deliveries of relatively small quantities in compliance with

T 4. For the supply management function, time-based strategies that impact

T 5. In fixed quantity inventory models, a fixed economic order quantity is ordered

F 7. In Kanban systems large raw material inventories are necessary.

F 9. Supply chain inventory management involves establishing operational design of

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

You might also like