Operations and Supply Chain Management
In order for Peter to achieve his objectives for purchasing and inventory management we must closely study the issues of inventory level review, holding costs and safety stock.
Holding cost is money spent to keep and maintain a stock of goods in storage. It is largely recognised that a healthy holding stock figure is between 25% and 33.33% of material costs. Peter has holding costs of 21% which is just touching on a fifth of Danker’s materials cost. Now we could take this to mean that Peter therefore does not have enough inventory to meet the growing demands of the Standard Line, however, it is more realistic to consider that adequate finance is not being deployed to this area resulting in remaining stock being spoiled and unusable. This in turn leads to poor quality goods, reduced customer satisfaction and a financial loss. It is essentially squandering money. It would appear that Danker Furniture Ltd. have an abundance of safety stock as it states that ‘if any quality issues arose during production, another one was available from stock’ and that ‘carrying safety stock to protect against problems was the most convenient approach adopted.’
As Dankers Ltd. dealing with the Standard Line is a relatively new venture it is understandable that they would want to carry safety stock to mitigate the risk of stockouts (shortfalls in raw materials or packaging) as there would be, as with any new venture, uncertainties in supply and demand.
To deal effectively with these issues I would advise Peter to firstly implement a material requirements planning (MRP) worksheet so Dankers can judge how much they need to produce to meet their forecasted sales demand without relying on safety stock. Only with approximate product demand forecast can they maintain a healthy and viable volume of safety stock.
Peter also needs to address the issue of inventory costs head on by studying his inventory levels and putting in place a more efficient inventory level review management
Holding cost is money spent to keep and maintain a stock of goods in storage. It is largely recognised that a healthy holding stock figure is between 25% and 33.33% of material costs. Peter has holding costs of 21% which is just touching on a fifth of Danker’s materials cost. Now we could take this to mean that Peter therefore does not have enough inventory to meet the growing demands of the Standard Line, however, it is more realistic to consider that adequate finance is not being deployed to this area resulting in remaining stock being spoiled and unusable. This in turn leads to poor quality goods, reduced customer satisfaction and a financial loss. It is essentially squandering money. It would appear that Danker Furniture Ltd. have an abundance of safety stock as it states that ‘if any quality issues arose during production, another one was available from stock’ and that ‘carrying safety stock to protect against problems was the most convenient approach adopted.’
As Dankers Ltd. dealing with the Standard Line is a relatively new venture it is understandable that they would want to carry safety stock to mitigate the risk of stockouts (shortfalls in raw materials or packaging) as there would be, as with any new venture, uncertainties in supply and demand.
To deal effectively with these issues I would advise Peter to firstly implement a material requirements planning (MRP) worksheet so Dankers can judge how much they need to produce to meet their forecasted sales demand without relying on safety stock. Only with approximate product demand forecast can they maintain a healthy and viable volume of safety stock.
Peter also needs to address the issue of inventory costs head on by studying his inventory levels and putting in place a more efficient inventory level review management