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FARMERS RESTAURANT CASE

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DR. RISKAYANTO

Oleh:

ANINDITA PURWANINGRUM

91215030

49PB02

MAGISTER MANAJEMEN

MANAJENEM PERBANKAN

UNIVERSITAS GUNADARMA

2017

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Farmers Restaurant Case

Sarah Lubbers and Chris Rusche

1. Describe the importance of inventory management as it relates to the Farmers


Restaurant?
2. What ordering system would be best for this situation?
3. Given the following information, provide an example of how much of Farmers
Sausage Gravy Mix should be ordered. You are doing the order for Thursday. Also,
Kristin would like a service level of 95%, and you have found that there is a standard
deviation of 3.5 units per week, and a moving average weekly demand of 35 servings.
The gravy mix comes in packs of two servings. There are currently three packs in
inventory.
4. Given the above information and an on-hand inventory of 12, determine the risk of
stock out at the end of initial lead time and at the end of the second lead time. The
lead time is 2 days and orders are placed once a week.
5. The supplier Kristin uses is located in Ohio. Why might Kristin consider dealing with
a nearby supplier instead of the one in Ohio? What reasons might there be for not
switching suppliers?

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Farmers Restaurant Analysis

Sarah Lubbers and Chris Rusche

1. Describe the importance of inventory management as it relates to the Farmers


Restaurant?

Farmers Restaurant is a full service restaurant which means they must have an
effective management with their inventories in order to serve their customers right. The
ordering process is reliant on the stocks needed by the restaurant in order to cook the food in
their menus.

In this case, the problem occurs when Kirsten Davis, the manager, encounters
problems in ordering their inventories. She does not enough experience in inventory
management such as forecasting, ordering process, etc. that leads to problems. It affected a
lot of aspects in the business. It affected their servings to their customers because when they
experience shortage they will not able to give the orders while there are times they experience
surplus that is why they have lots of excess. It also has a bearing on their revenue since
ordering inventories involve expenses.

In this line of business, the manager must be good in forecasting and must monitor the
stocks they needed to maximize the order costs and carrying costs as well as maintain that
they have always enough goods to serve the dishes on their menus. The must control the
variations of demands and know how to adjust with it.

2. What ordering system would be best for this situation?

Just like any investment in business, inventory needs to serve the purpose of
maximizing profit. However, in many cases inventory has turned into a major cash flow
constraint thus making it necessary to optimize inventory using analytical and statistical
methods in an integrated approach. One of the biggest challenges in optimizing inventory is
the fact that it is merely an output of many inter-organizational processes. All too often

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organizations attempt to lower inventory using non-analytical approaches which lower
service levels.

Farmers Restaurant is one of the restaurants in Grand Rapids/Wyoming metro area.


The business is involved in food services. In this case, they must ensure that the foods are
fresh, avoid left-overs and spoilage. Therefore they must use an effective system for the
inventory management. Also, since there are so many competitors, the restaurant must make
sure that they are satisfying the customers so that their regulars will increase and still
patronize the restaurant.

The restaurant is facing problems regarding with the inventories and it affected a lot
the business in terms of maximizing the profit, increasing the number of customers and the
improvement of the business.

As a manager, Kirsten must do perform her duties since she is in the one in charge
with this. She must know how to deal with problems such as forecasting the amount to be
ordered, the right time intervals, adjustments when there are unexpected problems and lastly
maintain that everything is properly and simultaneously working.

Inventory management, or inventory control, is an attempt to balance inventory needs


and requirements with the need to minimize costs resulting from obtaining and holding
inventory. So, among the alternative solutions given, Solution A: Single Period Model is the
best solution for Farmers Restaurant. Evaluating the advantages and disadvantages of the
given solutions, single period model is appropriate since the business is involved in food
services.

The nature of goods is also considered. If the company uses the Fixed-order-interval
(FOI) method, it cannot checked dependably for spoilages and stock outs, since the nature of
the model does not correct constantly on the totalling of inventory of the goods. Contrasting
with the single-period model, there is a proper distribution for shortage costs which happened
as a problem in the case due to a high demand, and for spoilage costs which happened when a
large number of goods are left unused and as a result, becomes expired.

Aside from the fact that this model is suitable for business with perishable goods, its
goal is to ascertain the order quantity or stocking level that will reduce the long-run excess
and shortage costs. Analysis on this model generally focuses on shortage costs and excess.
Shortage cost may include a charge for loss of customer goodwill as well as the opportunity

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cost of lost sales. It is simply unrealized profit per unit. On the other hand, excess costs
pertain to items left over at the end of the period. This model tries to balance the cost of lost
customer goodwill and opportunity cost that is incurred from not having enough inventories,
with the cost of having excess inventory left at the end of a period.

3. Given the following information, provide an example of how much of Farmers


Sausage Gravy Mix should be ordered. You are doing the order for Thursday. Also,
Kristin would like a service level of 95%, and you have found that there is a
standard deviation of 3.5 units per week, and a moving average weekly demand of
35 servings. The gravy mix comes in packs of two servings. There are currently
three packs in inventory.

Farmers Restaurant is starting to see a decline in customer counts and the owners are
concerned about the above average in food costs. Kristin, the general manager, is struggling
with the inventory process. On hand inventories are taken on a weekly basis by hand and then
entered into the computer system that maintains records and tracks costs. Food costs make up
about 30% of the total cost so the owners monitor them closely. Ordering is done weekly. The
week starts on Thursday for the week ending on Wednesday. The company generally uses a
computer software system that provides a moving average and the manager would than the
company has a guideline of 29%-36% of on hand inventory standard. The inventory is
perishable so if too much is ordered it will quickly become waste. Kristin has been using her
own ordering method and is not meeting the company standards. She doesnt have a great
understanding of the computer ordering system and is not meeting the company standards
with her own ordering method. After analyzing how much product we need to for the week,
we must look at the chance of running out of product before the next order and the lead-time
until it arrives.

This stated the lead time used by the company. Intervals are important in making an
order especially in this type of business. This is one point to be considered in improving the
inventory system to be used.

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Also, they are using periodic system in order to reconcile what is recorded on the files
and theactual number of the stocks. This must be monitor properly because this will help on
controlling suppliesto be ordered and meets the demands needed

Orders are placed on a weekly basis after inventory is calculated and shipments are
received the same day every week. While the single-period model is excellent at factoring
based on excess and shortage costs, Kristin must be able to effectively determine the order
quantities needed to maintain operations from one order to the next. Take for instance this
theoretical situation provided by Stevenson in Operations Management (2015) regarding
ordering gravy packets: Kristin would like a service level of 95%, and you have found that
there is a standard deviation of 3.5 units per week, and a moving average weekly demand of
35 servings. The gravy comes in packs of two servings. There are currently three packs in
inventory. With the order cycle in place Kristin must be able to effectively calculate the
amounts needed between order cycles. The fixed-order method can further more be broken
down into the fixed-interval method, which is based upon a fixed order interval and allows
for variations in demand, and is the most representative to the order processing calculations
needed by Kristen (Stevenson, 2015). So given the information provided regarding the gravy
orders several important values can be pulled and utilized for fixed-interval calculations.
There is a demand for 35 servings per week, or 5 servings per day. The desired service level
is 95%. The standard deviation is 3.5 servings per week or 0.5 servings per day. The amount
on hand at recording is 6 servings.

Doing order for Thursday, service level required is 95%, a standard deviation of 3.5
units per week, moving average demand of 35 servings, and the gravy mix comes in pack of
two servings. There are currently three packs in inventory on hand inventory of 12 servings,
lead time is 2 days, and order are placed once a week.

d = 35/7 = 5 servings per day

Desired service level = 95 percent

Sigma(d) = 3.5/7 = 0.5 servings per day

Amount on hand at reorder time = 3*2 = 6 servings

LT = 2 days

OI = 7 days

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z = 1.645 for 95 percent service level

Amount to order = d (OI + LT)+z*Sigma(d)*(OI + LT)^0.5 A

= 5*(7+2) +1.645*0.5* (7+2)-6

= 45+2.4675-6 = 41.4675 = 42 servings

Based upon the known information and the fixed-interval model Kristin can

calculate that the order quantity needed to meet Farmers inventory

requirements would be 42 servings. This means that Kristin would need to order

21 packs of gravy on the current order to meet anticipated demand for the

coming week.

4. Given the above information and an on-hand inventory of 12, determine the risk of
stock out at the end of initial lead time and at the end of the second lead time. The
lead time is 2 days and orders are placed once a week.
ROP = d * LT + z * Sigma(d) (LT) ^.5
For the risk of stock out for the first lead time:
12 servings = 5 * 2 + z * 0.5 * 2^.5
z = (12 10) / (0.5 * 2) = 2.83
From z table, we can see the service level is .9976. The risk is 1 - .9976 = .0024,
which is fairly low and the service level closed to 100 percent.
For the risk of a stock at the end of the second lead time:
12 servings + 42servings = 5 * (2 + 7) + z * 0.5 * (2 + 7)^.5
54servings = 5 * 9 + z * 0.5 * 3 z = (54 45) / 1.5= 6
This value is way out in the right tail of the normal distribution, making the service
level virtually 100 percent, and, thus, the risk of a stock out at this point is essentially
equal to zero.

5. The supplier Kristin uses is located in Ohio. Why might Kristin consider dealing
with a nearby supplier instead of the one in Ohio? What reasons might there be for
not switching suppliers?
The location of Farmers restaurant is in the Grand Rapids/Wyoming metro area of
Michigan, and the supplier is in Ohio. When we calculated the distance from Michigan to
Ohio its greater than 400 kilometers. The main issue revolves around the distance along with
the wrong supply chain or strategic inventory plan. So Kristin should use inventory
management model to deal with this challenge of supply

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First of all, the suppliers location is more relevant to consider, and another is
performance. What to produce in which supplier, inventory how much to order, when to
order, transportation, shipment size and scheduling must be considered.
An effective way to improve inventory ordering performance is for supplier to
determine the how much inventory that should be ordered by its downstream customers,
rather than preferential consider maximize profits. We also can to reduce inventory and
increase flexibility.

Conclusion

Restaurant businesses rely on inventory management as a key aspect of business


operations. An effective inventory management model is one of the tools that Kristin can use
to solve restaurant issues. The fixed-order-interval system can result in tight control, with the
restaurants inventory. In addition, when multiple items come from the same supplier,
grouping orders can yield savings in ordering, packing and shipping cost. Moreover, it may
be the only viable method if inventory withdrawals cannot be closely monitored. The
inventory management procedure is acquired to ensure that the business operations run
smoothly, and the restaurant is successful.

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