Question

Mike Riley is the operation director for WFA (Which used to be known as Water for Africa).WFA is a charitable trust that was set up in the 1970s to provide long- term help for victims of environmental and political crises. WFA specialise in helping the inhabitants of disaster stricken towns and villages install their own water Supplies and improve sanitation facilities.

Because all of the funds have to be raised through the effort of volunteers, the directorate is concerned about mining cost. Mike is constantly under pressure to reduce his stock of sanitation equipment and supplies. Indeed over the last four years he has reduced stock holing across all of the stores from around €10m to 5m (cost of capital (10%) x cost of an items). But now it seems he has gone too far in reducing inventories. His filed manger are compiling of shortage, particular of copper pipe and sealant. From his main store in UK Mike Supplies 14 Regional stores which are close to where the 47 project are underway. The field workers can e-mail orders for any items, in predetermined order quantities, at any time and delivery is usually within three weeks. The expectation is portable electricity generators which are delivered directly from the supplier and take around six months. The cost of administration and delivery for any part is calculated at €45.

Table:30.1.Sample from a stock record at a regional store
Items	usage items/ year	cost per items (€)	Number in Stock	Order Quantity
Plastic joints	12000	0.3	450	2000
Blankets	10000	0.7	4000	10000
Soil pipe (4m lengths	8500	2.8	6420	10000
Compression joints	7500	3.8	8500	10000
Tinned food	5500	0.35	240	1000
Copper pipe (2m lengths)	4600	3.65	0	50
Buckets	3500	0.5	320	1000
Sealant (tubes)	3200	0.2	20	1000
Dehydrated food packs	2050	0.4	3800	5000
Petrol cans	60	2.9	10	50
Water pumps	9	555	9	10
Portable generators	4	1050	1	1
Water trailers	3	450	2	5

On a visit to a new project, Mike called into the regional store and checked the stock records on the computer. Being short of time, he selected 13 items from the 105 on the database-the result are shown in table 30.1.Walking around the store he was concerned to see large quantities of many items. He also noticed that some of the dehydrated food was more than 12 months old and past it sell- by date. He could not find any tubes of sealant but he noticed about 100 lengths of copper pipe in a corner.

Mike was bewildered. The directorate thought too much money was tied up in stock, he thought he had reduced it as far as he could –so much so that the field operation complain of shortages – yet there were heaps of equipment and rotting supplies in the storages.

Question:

1.            Evaluate the stock holding policies at WFA.

2.            What changes should Mike make?

Answer 1

Ans 1 The stock holding policies are not as per the usage of the material required or used in the project because some of the stocks are more in closing inventory than what is actually used like:

Compression Stock : Usage for the year is 7500 while in stock there is already 8500 so no need to order this product

Copper pipe 2m length the usage of this product is 4600 for a year and there is 0 units in the stock, This shows that there is not study of stock inventory done on the basis of the production/demand and there is no Reorder level or Economic Order quantity calcuated and on basis of just 13 items of 105 you cannot judge the iventory level is more or less and accordinlgy increase or reduce ....you need to check the fast moving items and slow moving items and then do sample testing from them to justify how much stock is obselete and how much is required.

Ans 2. Overall looking at the inventory level and shortage of copper pipe , it would be suggested that Mike should put in place a proper Inventorymanagement in which study of the demand of the supplies required should be calculated , the same should be classifed as Fast moving and Slow moving items so you know that you need not lock up more funds in the slow moving items

Calculation of EOQ ( Economic Order Quantity) should be done so it can minimize the total cost of inventory such as holding cost,order and shortage cost

Company should also work on calcualating the Reorder Quantity so that there is no shortage of goods and hence there is impact on the production/sales

Knowledge of lead times and lead time variability also you should identity the stock which are the Just in time stocks they are such items which are ordered only absolutley necessary this will ensure the funds are not locked in such type of stocks

Apart from this proper system should be built wherein all the locations data relating to demand and supply and usage is maintained , proper coding system is given to all the stocks as per their usage ... This will ensure that there are no stockouts , manage multiple locations and ensure proper record keeping and also time to time stock reports can be generated so that if there are no changes are required it can be evaluated and done with immediate effect Such practise not only ensures that there is not much amount blocked in stock holding but also ensures effective inventory management