Inventory exercise: ABC analysis and RISK POOLING

A firm, that competes in the footwear sector, has in its products range sport footwear for 7 different sports: football, golf, tennis, cycling, athletics, climbing and basketball.

After a survey among people aged between 10 and 45 years that shows differences in the monthly demand of footwear, the company has decided to change its inventroy management strategy: the stocks won’t be managed equally any longer, and the resources will be allocated according to the weight of each product in terms of the company accumulated returns.

The following table shows the data connected to the demand of each kind of footwear and its selling price.

PRODUCT

(footwear)

MONTHLY DEMAND

(units)

UNIT COST

(euros)

football 3830 60
golf 250 80
tennis 1100 45
cycling 300 50
athletics 450 75
climbing 250 30
basketball 2750 60

Question 1: using the ABC analysis, tell which are the footwear that should be managed with more resources and the ones to which the company could dedicate fewer resources.

Assume now that football boots are sold not only in the domestic market of the company, but also in another country.

Currently, to manage the delivery, the company owns two warehouses, and each receives only the stock intended for one market.

  • Warehouse A demands monthly on average 2845, while warehouse B 985
  • Replenishment lead-time is 3 weeks for both warehouses.
  • The cost for a replenishment order (hence, the procurement cost, S) is 25€
  • The inventory carrying cost (H) is 24% per year
  • The service level required is 95%

Assume that the demand is normally distributed with typical demand over six months, and the data are the following:

Month Demand in warehouse A Demand in warehouse B Combined demand in warehouses
1 2575 1025 3600
2 2685 990 3675
3 3000 815 3815
4 2900 1340 4240
5 3410 955 4365
6 2500 785 3285
Average demand (D) 2845 985 3830
st. deviation (sd) 306,54 181,41 371,6

Question 2: calculate the average inventory level (AIL) in the current situation, and the AIL if the company managed all the stock only in one warehouse.

Finally, decide which is the best solution for the company.

Solution

By: Matteo Maccarana

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