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Inventory Management

Caf Kibbe Case Study


Group 12
Arunachalam Balaji (PBS15211174)
Karthik Govindarajoo (PBS15211187)
Logeswaran Mariappan (PBS15211175)
Thurga Mahalingam (PBS15211186)

OPERATIONS MANAGEMENT(GSM5113)

What is Inventory Management?


Inventory managementis the process of ensuring
that a company always has the products it needs on
hand and that it keeps costs as low as possible
Getting everything just right is exactly what
inventory management is all about.
Good inventory management is all about having
the right amount of product, at the right price, at
the right time, and in the right place OPERATIONS MANAGEMENT(GSM5113)

Types of Inventory Management


The periodic inventory methodis one in which inventory data is
updated after a specific interval of time, usually a year. This is where
the term periodic comes from. Data is entered into the inventory
systems after a specific period of time.
Under theperpetual inventory method, a business continually
updates its inventory records. A perpetual inventory system has the
advantages of both providing up-to-date inventory balance
information and requiring a reduced level of physical inventory
counts. Plus, it saves the company time and money by lowering
inventory costs and reducing manpower needed to run the business.
OPERATIONS MANAGEMENT(GSM5113)

Caf Kibbe
In this particular case, Nabil who is the manager of Caf Kibbe modestly
does not fully understand how to utilize the moving average forecasting
technique available to him.
Because of this, Nabil has been using his own intuition to manage
inventory that has not only increased the typical cost average of previous
orders but has also caused additional foods to perish sooner that
ultimately needed to be thrown away.
Furthermore, there are additional difficulties because many of the items
are packed in multiple quantities therefore he will always have more in
stock than he actually needs.
OPERATIONS MANAGEMENT(GSM5113)

Case Analysis.
The main causes why they are encountering difficulties regarding the
ordering of inventory of the restaurant from its suppliers.
The utmost solution for Caf restaurant in order to uphold accurate
stocks of inventory and avoid the occurrence of surplus or shortage.
The consequences to the restaurant as a whole of the problem
mentioned.
How would the restaurant implement its altemative plan of action in
inventory management to make sure of its attainment.
OPERATIONS MANAGEMENT(GSM5113)

1. Describe the importance of inventory management as


it relates to Cafe Kibbe.

To Meet Anticipated Customer Demand


To Smooth Production Requirements
To Protect Against Stock-outs
To Take Advantage of Order Cycles
To Take Advantage of Quantity Discounts
OPERATIONS MANAGEMENT(GSM5113)

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

Single Period Model is the best solution for this restaurant .


Evaluating the advantages and disadvantages of the given solution,
sing period model is appropriate is since the business is involved in
food services.
If the company uses the Fixed-order-interval(FOI) method it cannot
check dependably for spoilages and stocks outs, since the nature of
the model does not correct constantly on the total of inventory of the
goods.
Single period model is there is a proper distribution for shortage costs
which happen 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,become expired.

OPERATIONS MANAGEMENT(GSM5113)

3. Given the following information, provide an example of how much Moroccan harissa
spice paste seasoning should be ordered. You are doing the order for Thursday. Nabil
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 Moroccan
harissa seasoning comes in packs of two servings. There are currently three packs in
inventory.

The fixed-interval method of calculation is as follows:


Amount to order = Expected demand during interval + Safety stock Amount
on hand at reorder
Q = d(OI + LT) + z d (OI+LT) A

Q = amount to order`
d = demand = 5 servings per day
OI = Order interval = 7 day

OPERATIONS MANAGEMENT(GSM5113)

Substituting the values in to the formula:


Q = 5(7+2) + 1.645*0.5* (7+2) 6
Q = 45+2.4675-6
Q = 41.4675 servings`
Based on the fixed-interval model, the order quantity needed to meet the
inventory requirements would be 42 servings.
This means that Nabil would need to order 21 packs of the seasoning paste on
the current order to meet anticipated demand for the coming week.

OPERATIONS MANAGEMENT(GSM5113)

4. Given the above information and supposing 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 two days and orders
are placed once a week.

LT = Lead Time =2 days


OI = Order Interval = 7 days
d = Demand = 5 servings per day

OPERATIONS MANAGEMENT(GSM5113)

Initial Lead-time
Q = d x LT + z LT d
12= 5*2 + z(1.414)(0.5)
12= 10+ .707z
2= .707z
Z= 2.83
Percentile= 99.5 %

End of second lead-time:


Q = d(OI + LT) + z d (OI+LT) A
42= 5(7+2)+ z(.5)(3)-12
42= 33+1.5z
9=1.5z
z=6

As per100%
the estimation above, there is a very small chance that there
Percentile=
will be limited stock out before the next order arrives. With each
percentile at 99.5 and 100%, they will likely not have a stock shortage.

OPERATIONS MANAGEMENT(GSM5113)

5. For items other than vegetables, fruits, fresh bread, and the like, which are sourced locally,
the supplier Nabil uses is located in Lebanon, where the owners of the restaurant are based.
Why might Nabil consider dealing with a nearby supplier instead of the one in Lebanon? What
reasons might there be for not switching suppliers?

Reasons to switch local supplier:


Shorter Lead Time
Switching to a local supplier will improve delivery lead times. If a supplier from different
city, it takes much longer between ordering and delivery time. When using a local
supplier, they can hold less of an inventory due to the fact that the turn-around time will
likely be much shorter.
Reduces Hassle of Accurate Forecasting
If the supplier is in the same city, Nabil may be able visit the retailer and purchase the
products in person. It takes a lot more preparation and more exact forecasts when using a
retailer that is in different city.
OPERATIONS MANAGEMENT(GSM5113)

Help Local Community


Supporting locally sourced product appeals to the customers that they
are helping their local community, thus potential of getting more support
from the local customers which helps to increase sales indirectly.

Fresh Food
Buying local means much fresher foods. This will allow for foods to stay
on the shelves longer without them going past their expiration date.
Buying fresher foods is one way that restaurants can give them more
flexibility in ordering, without have to order more food and throwing it
away because it expired.

OPERATIONS MANAGEMENT(GSM5113)

Potential Reasons to use existing Lebanon Supplier:


Product Cost
It may still be cheaper given product and time to use the supplier in
Lebanon. Sometimes buying from a local retailer can be quite expensive.
Product Availability
Potential reasons which influences Nabil to choose sourcing from the
retailer in Lebanon is due to the ability to get a product. Local retailers
may have a smaller variety of products. This might limit restaurant from
being able to prepare certain meals, thus less varieties on menu.
OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
1. Explain briefly how a higher carrying cost can result in a decrease in inventory?
As the carrying cost increase, holding inventory becomes more expensive. For examples, if the order size is relatively high,
the average inventory will be higher, resulting in high carrying costs. At the same time, ordering large quantities at
infrequent intervals can hold down annual ordering costs, but that would result in higher average inventory levels and
therefore increased carrying costs. Conversely, in order to avoid higher inventory carrying costs, the company will order
more frequently in smaller quantities because ordering smaller quantities will lead to carrying fewer inventories.
For examples a Manufacturing company for agricultural machineries such as rotavator will also keep stock on some of
the spare parts such as German chain, drive shaft and blades. When the demand higher for this type of rotavator the
company will order a higher volume of German chain for the spare parts sales, which will increased the higher carrying
cost. If suddenly the demand of the rotavator using German chain reduce and substituted by a gear type of rotavator what
will happen to all the German chain which we inventory earlier for spare parts sales? All this German chain will be
overstocking and stuck in the store. Therefore the carrying cost of the chain will be higher than it will resulting in decrease
the value of inventory. In normal practice companies will under value this kind of slow moving inventories by increasing the
cost of goods sold and decrease the inventory value in balance sheet. This will bring impact to the performance of the
company since this process will also reduce the gross profit and working capital of the company.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
2. As a supermarket manager, how would you go about evaluating the criticalness of an inventory shortage?
Criticalness in the context of supermarket inventory refers to the relative importance of an inventory item. Supermarket
managers need to balance limited resources with the cost of holding stock inventory and the marketing value of providing
reasonable levels of customer service. To do this they require a method that keeps track of inventory and determines
stocking and restocking policies based on how critical or important an item is to the business and its clients. This is
determined by several factors, such as an item's shelf life, value to customers and profitability margins.
Economic Order Quantity (EOQ)
One method of determining an inventory item's criticalness is to calculate its economic order quantity, or the ideal number
of items you should keep in stock based on annual demand, order cost and the cost of keeping in stock.
Economic Production Quantity (EPQ)
A similar way of determining an item's criticalness in a supermarket's inventory is its economic production quantity. This
measure uses the economic order quantity rate but also takes into account its delivery rate and use rate. This measure of
criticalness is especially useful in supermarkets where stock ordering time is considerable.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
Interchangeable Products
An inventory's item criticalness may also be measured by the number of similar alternatives. This is especially important for
items that are considered part of a community's staple diet. For instance, a supermarket running out of eggs or bread is more
critical than being out organic crunchy peanut butter.
ABC Inventory Control
The ABC inventory model control method assigns the criticalness of a stock keeping unit based on its sales volume and
revenue. This system classifies units with a high volume of sales or high revenue returns as A, items with a medium-range
volume of sales as B and items at the low end of the revenue spectrum with C, and keeps stock accordingly.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
3. A jewellery firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8 per stone
for quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and $10 per stone for lesser
quantities. The jewellery firm operates 200 days per year. Usage rate is 25 stones per day, and ordering costs are $48.
a. If carrying costs are $2 per year for each stone, find the order quantity that will minimize total annual cost.
Demand
S = Ordering Cost H = Carrying cost per unit
D= 25 stones per day x 200 days per
S =year
$ 48
H = $2 each stone per year
5000 stones per annum
Range

Unit Price

1-399

$10

400-599

$9

600 or more

$8

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
Step 1: Compute the common EOQ
2DS
H

2 x 5,000 x $48
$2

= 489.8 @ 490 stones

Step 2:
The 490 stones can be bought at $9 per stone because 490 falls in the range of 400-599 stones.
The total annual cost to purchase 5,000 stones per year, at the rate of 490 stones per order, will be
:TAC490 = CarryingDcost + Order cost + Purchase cost
Q
Q
2
=
H + 0 5,00
S + PD
49
0
0
=
48 + 9(5,000)
2 2 + 490
= 490 + 490 + 45,000
= $ 45,980
OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
Step 3:
Because lower cost range exist, each must be checked against the minimum cost generated by
490 stones at $9 each, to obtain a cost of $8 per stone, at least 600 stones per order are required,
and the total cost at that price break will be :TAC600 = CarryingDcost + Order cost + Purchase cost
Q
Q
2
=
H + 0 5,00
S + PD
60
0
0
=
48 + 8(5,000)
2 2 + 600
= 600 + 400 + 40,000
= $ 41,000
Therefore, because 600 stones per order yields the lowest total cost, 600 stones is the
overall optimal order quantity that will minimize total annual cost.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
3. A jewellery firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8 per stone
for quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and $10 per stone for lesser
quantities. The jewellery firm operates 200 days per year. Usage rate is 25 stones per day, and ordering costs are $48.
b. If annual carrying costs are 30 percent of unit cost, what is the optimal order size?
Demand
S = Ordering Cost H = Carrying cost per unit
D= 25 stones per day x 200 days per
S =year
$ 48
H = 0.30P each stone per year
5,000 stones per annum
Range

Unit Price

1-399

$10

0.30(10) = $3

400-599

$9

0.30(9) = $2.70

600 or more

$8

0.30(8) = $2.40

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
Step 1:
Find the minimum point for each price, starting with the lowest price, until you locate a feasible minimum point.
Minimum point $8 =

2DS
H

2 x 5,000 x $48
$2.40

= 447.2 @ 447 stones

Because an order size of 447 stones will cost $9 each rather than $8 each, 447 is not a feasible minimum point for $8 per
stone. Next try $9 per unit:Minimum point $9 =

2DS
H

2 x 5,000 x $48
$2.70

= 421.6 @ 422 stones

This is feasible: it falls in the $9 per stone range of 400-599.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
Step 2:
Now Compute the total cost for 422 stones, and compare it to the total annual cost of the
minimum quantity necessary to obtain a price of $8 per stone.
TAC422 = Carrying cost + Order cost + Purchase cost TAC600
= Carrying cost + Order cost +
Purchase cost
D
D
Q
Q
Q
Q
2
2
=
H+ 0
S + PD
=
H+
42
5,00
60 S + 0PD 5,00
2
0
0
0
=
48 + 9(5,000)
= 2
2.40600
+
48 + 8(5,000)
2 2.70 + 422
= 569.7 + 568.7 + 45,000
= $ 46,138.40

= 720 + 400 + 40,000


= $ 41,120

Thus, the minimum optimal order size is 600 stones.

OPERATIONS MANAGEMENT(GSM5113)

EXERCISE
3. A jewellery firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8 per stone
for quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and $10 per stone for lesser
quantities. The jewellery firm operates 200 days per year. Usage rate is 25 stones per day, and ordering costs are $48.
c. If lead time is six working days, at what point should the company reorder?
Reorder Point
ROP

=
=

Demand Rate x Lead Time

25 per day x 6 working days


150 Stones will be the point for the company

reorder

OPERATIONS MANAGEMENT(GSM5113)

OPERATIONS MANAGEMENT(GSM5113)

OPERATIONS MANAGEMENT(GSM5113)

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