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Radford Rails
John Lloyd
Mark Brownell
Ashley Dawson
Dr. Lachowicz
MGNT 357 Section 3 Operations Management
20 February 2008
Porterfield Room 172
Introduction:
Radford Rails is a fictional company located on Main Street in downtown
Radford, VA. We plan on opening this store in October of 2008. We sell snowboards,
snowboard accessories, and ski apparel in the winter months (October-March), and
skateboards, skateboard accessories and apparel in the summer months (AprilSeptember). We are currently focusing all of our attention on our opening season this
coming winter. We offer a skate park behind the store that will be open year round. There
is an admission rate for every time you come but we also offer a membership of $115 per
year which is more valuable.
Problem:
Our main problem is that we do not know how we are going to rotate our
inventory efficiently. We do not want excess inventory at the end of the season, and we
do not want shortages.
Alternatives Available:
There are several alternatives we can choose from, including the A-B-Capproach, finding out how much to order and when using the economic order quantity,
and how much to order using the fixed-order-interval model. Either way we go we must
keep track of our inventory using a periodic system or a perpetual system. Keeping track
of inventory will help us forecast future demand, will give us a realization of time
variability, and will help prevent shrinkage.
The A-B-C approach is a way of classifying and monitoring inventories.
Inventory items are divided into three categories based on importance to the company.
The A-class inventory items are generally high margin products and account for the
majority of the company’s revenue. While C-class items are low margin products and
account for the lowest portion of the company’s revenue. Under the basic assumptions of
the A-B-C model, the A items should receive the greatest amount of attention and C
items should receive the least. Being that C items generally wont cause much additional
cost they can be ordered in bulk or even a bit early. On the other hand, A items should be
ordered frequently but at low quantities. This means that the A items should be subjected
to cycle counting more frequently. Cycle counting is the physical counting of inventory
units and comparing results to inventory records for the company. After data has been
collected we must answer the questions of how much accuracy is needed, when counting
should be performed, and who should do it.
Another alternative is to use the fixed order quantity (economic order quantity).
This quantity (EOQ) is used to find out how many of a product should be ordered when
given the ordering costs and holding costs. If there less orders, our ordering cost will go
down, but the risk of our holding costs will go way up due to the possibility of excess
product. If we raise the number of orders, we lower the EOQ but raise ordering cost.
The purpose of the EOQ is to find the perfect number of items to order combining both
aspects of cost. This will also give us our cycle time(how long it takes for us to turnover
our inventory), our average inventory, product sales per day, and days per product sales;
all assuming that demand stays constant.
A third alternative to reduce our problem is to use the Fixed-Order interval model.
We would use this if we were to place order at fixed time intervals. Usually the intervals
are either weekly, biweekly, monthly, etc. Sometimes orders are in fixed intervals
because the supplier or the manufacturer has a policy. When using a fixed-order interval
option you must keep a close eye on it to make sure orders are coming in on-time and that
inventory is being distributed evenly with no backorders or stockouts. With this model
you must also determine the amount to order, which is the expected demand during
protection level plus safety stock less the amount on hand at reorder time. The positive
side to the fixed-order-interval model is that it would be good for us to use because our
removal of inventory cannot be closely monitored. On the other hand carrying costs may
increase due to requirements for more safety stock in order to avoid stockouts.
Recommendation:
Although every alternative has their benefits, we suggest the fixed quantity
method. As a new firm, we do not know the exact demands, and after some deliberation
we have decided that we want to order products when more products are definitely
needed, while keeping less safety stock.
Action Plan:
Using the fixed quantity order plan we will find our economic order quantity by
taking the square root of the equation (2DS/H). D is the demand per season, S is the
ordering cost, and H is the holding cost per unit; all are estimates and therefore are
givens. If our estimated demand stays constant we can figure out that our product sales
per day for example in low end boards would be 0.39 per day (highlighted on the cycle
time appendix, along with nine other of our top winter products). We find this by taking
our demand, and dividing it by 180, the number of days in our season.
With this number we can find our average order cycle length by taking Q/D
multiplied by 180 days. This will equal to approximately to 15 days. Our reorder point
for this product is when we have2 boards left, found by subtracting our lead time (4 days)
from 15 days, and then multiplying this number by the boards sold per day, 0.39. This
will give us a general view of what our cycle will look like if our demand stays constant.
As said before, our demand is an estimate. Demand will most likely increase
around the holiday seasons, so in this example when we only have two or even three
(during busy periods) low end boards left in stock, we must order more. From the
defaults of fixed quantity methods is that we are approximating how much we will need.
As our first year in business, we must do research to discover demand, but in reality we
must approximate and make changes from that point on.
Anticipated Outcome:
We expect this fixed quantity model will work for our best interest. If demand is
around what is anticipated and we manage safety stock responsible, we should have no or
minimal stock outs, and minimal excess winter inventory at the end of the season. When
we run low in a certain product we should have enough time to reorder, and using our
safety stock (most likely built up in the seasons of October and November) we should
offer our customers satisfaction in quality and selection.