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Large Bakers

In:

Submitted By jvumanalo
Words 453
Pages 2
To: Large Bakers Senior Management
From: Gregg Gregson, Supply Chain Manager
Subject: Inventory Decision

For years, Large Bakers has always been receiving our order for flour in 25 cars per shipment done in a haphazard way. We have been finding means where we can create a balance or trade off with our inventory and carrying costs without compromising customer satisfaction and reduce the risk of stock-out to just 98.5%.

Problem:

We would like to reduce the odds of running out of stock to only 1.5%. Two possible options can be utilized in order to achieve this objective.

Option A - 25-Car per shipment at even intervals with safety stock held for production variation

A fixed order of 25 cars per shipment provides cost savings of $5 per tonne. Moreover, our supplier will be able to guarantee on time delivery as the order cycle is predetermined and fixed. Adding buffer stock per order can reduce risks of stock-outs but this entails having additional carrying costs.

Option B - 25 cars at varying intervals without safety stock.

This will allow us to order 25 car shipments in a variable order cycle in order that we are able to maintain inventory levels at minimum and only order when inventory is depleting to a determined ordering point. Orders in varying intervals have a variable lead time of 4 days as supplier cannot guarantee on-time delivery because it is not known when next orders will be placed.

Analysis

Option A – 25 regular car shipments with additional safety stock done at a fixed cycle of 14 days or 2 weeks will provide a net savings of $183,525. Deciding on this option allows Large Bakers to cover unexpected demand with a standard deviation estimated at 300 tons. With a fixed order cycle, the company will be guaranteed on time loading and delivery of shipment. However, with the additional safety stock, we are likely to incur more

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