Inventory_Analysis

| Large Bakers | Memorandum November 22, 2011 To: Management, Large Bakers From: Greg Gregson, Supply Chain Manager SUBJECT: INVENTORY DISTRIBUTION ANALYSIS – PROPOSED CHANGES TO THE SUPPLY CHAIN Background: As was discussed, a review was performed of the current processes involved in the shipment of flour to our mill. The intent of the review was to determine whether we should change our current INVENTORY MANAGEMENT practices of receiving and processing individual railcars at the rate of approximately 2 cars per day. Discussions with our supplier and the shipping agency indicate that there are likely substantial savings to be realized if alternate shipping practices are adopted that would result in the realization of savings based upon economies-of-scale savings. While additional explanation of the methodology is provided later, the analysis compared the following two patterns: * Option 1 - 25 cars per shipment at 14-day intervals with safety stock held for production variation; or * Option 2 - 25 cars at varying intervals, but with the required extra safety stock. The analysis involved calculating the cost of shipping using different multi-car shipment sizes and determining the value of associated storage charges. By combining these charges, the analysis resulted in finding a TOTAL COST, which when compared to each other the lowest would form the recommended solution. Recommendation: Based upon the analysis that was performed, it is recommended that LARGE BAKER adopts OPTION 1 as their inventory strategy and would therefore realize savings of $84,900 annually. Enclosed are the details of the analysis that was performed, Greg Gregson Benchmark Information: * Two inventory patterns were analyzed: * 25 cars per shipment at even intervals with safety stock held for production variation; or * 25 cars at varying intervals, but without requiring the extra safety stock. * Regardless of the shipping pattern adopted, the probability of experiencing a stock out must be reduced to 1.5%. * Flour usage is established at 50,000 tonnes annually, which is 2,000 tonnes every two weeks, with a standard deviation of 300 tonnes over the 14-day window. * With a variable order cycle, the lead time from placement to receiving of the order is 4 days. * As a result of initial discussions, the supplier (mill) has indicated that it will not vary the order cost, regardless of the shipping pattern. * Discussions have indicated that with regular 14-day shipping cycles, on-time loading and on-time delivery are guaranteed. The Railway has indicated that it would cut its rate by $5 per tonne. * Under the variable order cycle scenario, the following factors apply: * The replenishment order is delayed until 4 days prior to when the product is needed; * Under this scenario, on-time deliver is NOT guaranteed; * There is a 1-day standard deviation to the delivery lead time; and * The freight rate saving will be $4.50 per tonne. * Carrying costs are calculated using the following information: * 25% of the value of the flour; * Flour value - $400 per tonne. Scenario Analysis: The following table summarizes the data analyzed regarding product usage and associated variances for the scenarios reviewed: Variation Due to Customer Demand AND Due to Delivery Lead Times |   |   |   |   |   |   |   |   |   | Annual | 14-days | daily | 4-day |   |   |   |   |   |   | (ROP) | Order Qty | Demand (tonnes) |   | 50,000.0 | 2,000.0 | 142.9 | 571.4 | 2000.0 | Variation (tonnes) |   |   | 300 | 80.2 | 160.4 |   | Demand (cars) |   | 625 | 25 | 2 | 7.1 | 25 | Using the above benchmark information, the following table summarizes the findings of the analysis that was conducted: Option Comparisons | Options | Projected Savings (Freight) | Lead Time (days) | Safety Stock (tonnes) | Average Inventory (tonnes) | Total Carrying Costs | Projected Freight Savings | Net Benefit | ONE | $ 5.00 | 14 | 651.0 | 1,651.0 | $165,100 | $ 250,000 | $84,900 | TWO | $ 4.50 | 4 | 466.0 | 1,466.0 | $146,603 | $ 225,000 | $78,397 | Findings: As a result of the analysis that was conducted, it would be more beneficial for Large Baker to implement the shipping strategy where 25 cars per shipment at even intervals with safety stock held for production variation. This option would result in: * additional savings of $6,600 annually over the other option reviewed which is determined as being the net benefit is determined as being the difference between the TOTAL CARRYING COSTS and the PROJECTED FREIGHT SAVINGS ($84,900 versus $78,397); * the additional safety stock that is required under the recommended option (185 tonnes more (651.0 versus 466.0) is valued at $18,497 annually; and * Under Option One, projected Freight Savings are projected to be $25,000 higher than the freight savings under Option Two