The Logistics Director of a retailer based in the UK has asked for your advice.
The Logistics Director works for a company that purchases a range of household furnishing products from Italy. The Logistics Director is responsible for all aspects of logistics concerned with the flow of inbound consignments to the UK.
The Managing Director of the UK retailer has recently returned from a visit to a manufacturer's factory (near Turin) and has been impressed by the changes in the production processes and the scope to reduce production costs - he has also attended a conference where there were several presentations about the use of Just-inTime (JIT) techniques.
The company is now reconsidering its own stock holding principles and practices and has decided to investigate a move towards a JIT system of stock flow in which they would place orders more frequently for smaller consignments of products.
This will require more frequent inbound consignments from manufacturers and the Managing Director feels it would be a good idea to carry out a study involving one of the more important supplier companies in order to assess the implications of the possible change.
The Managing Director has asked the Logistics Director to prepare a report for the Board setting out the implications of this change. The Logistics Director has asked for your advice as a consultant in preparing this report.
The following Data is available:
Total annual purchase = 25,000 units
Orders per year (at present) 10
Units per order (at present) 2,500
Weight per unit 0.1 tonnes (i.e. 100kg)
Order cost £25 per order
Purchase price, ex works £120 per unit
Both the retailer and the various manufacturer have an inventory carrying rate expressed as 30% per annum. This enables them to calculate the cost of carrying inventory as follows:
The Retailer's Inventory Carrying Cost = carrying rate (30%) x unit value(a) x (units per order/2)
The Manufacturer's Inventory Carrying Cost = carrying rate (30%) x unit value(b) x (units per order/2)
(a) Includes transport cost per unit plus purchase price per unit from the manufacturer.
(b) Value assumed to be manufacturer's selling price to the retailer.
The retailer currently purchases all products on an "ex works" basis from the Italian manufacturers.
At present the company receives consignments once every five or six weeks and has negotiated a transport rate for these shipments (£100/tonne). If consignments are shipped in smaller volumes this rate will rise to £125/tonne.
Your report must address the following questions:
1) Calculate the effects on the costs for the two supply chain partners of changing from a system based around 10 orders per year to one in which 50 orders per year are shipped.
2) Investigate, quantify and comment on the sensitivity of the results to changes in the given costs and other data.
Your answer should show the approach you have adopted to calculations and include graphs and tables where necessary and appropriate.
a) To answer Q1 you will need to calculate the costs for the existing supply chain (and allocate costs to the partners) and then calculate a new supply chain (and allocate costs to the partners).
I suggest you write a few notes to explain your thoughts or reasoning and then if you make a numerical or logical error at least it will be clear why you did this and hopefully the explanation will make sense.
b) For Q2 you need to vary some of the values - it is up to you to choose which values to vary and to explain why it makes sense to change the values. Some changes are more plausible (likely) than others and maybe you need to consider what are the most important and likely changes.
Notes: Inventory carrying rate is a short way of considering the range of costs associated with holding inventory (stock). These costs include:
- Loss (pilferage etc)
- Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere)