MT236 Unit 5 Inventory Analysis Example

A Gift Pack That Sits for 38 Weeks: A Unit 5 Inventory Analysis for a Hot Sauce Maker

[Student Name]

Purdue University Global

MT236: Introduction to Supply Chain Management

Unit 5 Inventory Analysis

[Instructor Name]

[Date]

Alamo Ridge Pepper Co., its items, values, stock levels and costs are composite and illustrative; bracketed figures stand where the company's inventory records would supply the numbers; the sources cited are real.

ABC Classification

The nine finished items are ranked by annual volume at cost, the units sold times the cost to make each. Four A items lead: green jalapeno five-ounce at about [$103,680], red habanero five-ounce at [$86,400], chipotle five-ounce at [$72,000] and original red twelve-ounce at [$63,360]. Together they are about 68 percent of the [$478,588] total. Two B items, verde twelve-ounce at [$48,000] and smoked garlic five-ounce at [$38,146], add about 18 percent. Three C items, ghost pepper five-ounce at [$29,800], habanero twelve-ounce at [$24,602] and the holiday gift pack at [$12,600], make up the last 14 percent.

Silver et al. (2017) describe ABC classification as a way to focus management attention, with tight control and frequent review for the few items that make up most of the value and simpler rules for the many that make up little.

Where the Stock Sits

Finished stock on hand tells a different story. The A items hold between eight and eleven weeks of supply each, about [$59,000] together. The B items hold twelve to fourteen weeks, about [$21,300]. The C items hold far more relative to what they sell: the ghost pepper about twenty weeks of supply, the twelve-ounce habanero about twenty-two weeks and the gift pack about thirty-eight weeks. Together the C items hold about [$31,100], about 28 percent of the [$111,500] in finished stock.

Turns tell the same story. The A items turn about five to six and a half times a year, the B items about four, and the C items between one and a half and two and a half times. The gift pack turns about 1.4 times a year.

Why the C Items Pile Up

Two causes explain most of the excess. The bottling line runs each flavor in a minimum batch of about [200] cases because changeovers take half a shift, and for slow sellers a single batch can last five months. And the gift pack is assembled once a year in October for the holiday season, then the leftovers sit until the next October. Neither cause is a forecasting error; both come from production decisions made without considering inventory cost.

The Cost of Carrying

Carrying cost includes the money tied up in stock, warehouse space, handling, insurance and the risk that product passes its best-by date. Alamo Ridge's accountant estimates it at about 25 percent of inventory value a year. On the [$31,100] held in C items, that is about [$7,800] a year, for items that bring in only 14 percent of the volume. Hot sauce keeps well, but the label's best-by date is about eighteen months, so slow items held for many months also face write-off risk.

The gift pack spends nearly three quarters of every year waiting for December.

Recommendations for Finished Goods

For the C items, Alamo Ridge should run smaller batches less often by pairing slow flavors with a similar fast one on the same day to reduce changeover time, aim for no more than twelve weeks of supply, and assemble gift packs in two smaller runs in October and November based on early orders. It should also consider whether the twelve-ounce habanero, its slowest item, is worth keeping. For the A items, current stock levels are reasonable, though they should be reviewed monthly against the forecast from Unit 4.

A Reorder Rule for the Five-Ounce Bottle

Empty five-ounce bottles are the company's most important purchased input, used by six of the nine items. The company uses about [290,000] a year, or about [5,580] a week; week-to-week use varies with a standard deviation near [900]. After the Unit 3 decision, bottles come from the Pennsylvania plant with a three-week lead time.

The reorder point is the expected use during the lead time plus safety stock. Expected use over three weeks is about 16,740 bottles. Safety stock for a 95 percent cycle service level uses a z value of 1.65 times the weekly standard deviation times the square root of three weeks, about 2,570 bottles. The reorder point is therefore about 19,300 bottles: when stock on hand plus bottles on order falls to that level, a new order goes out.

The order quantity follows the economic order quantity. With an ordering and receiving cost of about [$150] per order and a carrying cost of 25 percent of the [$0.28] bottle price, or about [$0.07] a bottle a year, the formula gives about 35,000 bottles, which matches the plant's half-truckload minimum. Zipkin (2000) shows that total cost changes little near the economic order quantity, so rounding to the supplier's minimum costs almost nothing. Chopra and Meindl (2019) note that safety stock should be revisited whenever lead time or demand variability changes, and a switch of suppliers is exactly such a change. Alamo Ridge should therefore recheck the reorder point after the first three Pennsylvania deliveries, since the plant's actual lead time may differ from its quote.

References

Chopra, S., & Meindl, P. (2019). Supply chain management: Strategy, planning, and operation (7th ed.). Pearson.

Silver, E. A., Pyke, D. F., & Thomas, D. J. (2017). Inventory and production management in supply chains (4th ed.). CRC Press.

Zipkin, P. H. (2000). Foundations of inventory management. McGraw-Hill.