Blanchard Importing And Distributing Co., Inc

Blanchard Importing and Distributing Co., Inc

Question 1: EOQ/ROP Calculations

Multi period Inventory System: Fixed-Order Quantity Model (EOQ/ROP)

Assumptions:

Ð'* Demand for products is constant, however safety stock added as precaution to stock outs.

Ð'* Probability of not stocking out is 95%

Ð'* Lead time is constant

Ð'* Price per unit is constant

Ð'* Inventory holding cost is based on average inventory and storage costs for safety stock

Ð'* Setup costs are constant

Ð'* All demands for product will be satisfied

Setup Costs: Consists of combination of blending costs and other various setup costs. Blending costs include withdrawing spirits from storage and complete rectification of item. The other various setup costs consist of size changeovers, label changeovers, and order processing costs. The original 1969 figures were also used for the adjusted 1972 figures.

Blending/Withdraw spirits from storage/Complete rectification Varies

Size changeover $8.85

Label changeover $11.78

Order processing cost $51.43

Total $72.06

Annual Demand: Based on Fiscal Year Ending January 1972 sales, located in Exhibit 5. Determined average weekly demand based on the 1971 sales over 52 week period.

Annual Holding Cost (H): We agree with the 1969 figure of 11.5% total. This includes 9% Cost of Capital and 2.5% other holding costs, which include estimated costs of obsolescence, shrinkage, insurance and year-end inventory tax. This figure also takes into consideration the potential for additional costs due to storage costs for the safety stock we have added to our ROP. However, based on current warehouse capacity, the reserved space for finished goods is only used a maximum of 50% at any given time. This allows for plenty additional storage space for the additional inventory and does not affect the annual holding cost percentage of 11.5%. The total annual holding cost will vary based on number of units in inventory for the year. This figure is computed in the accompanying chart by dividing the lead time (3.5 weeks) into 52 weeks and multiplying that by the amount of safety stock units used during that time period. This is then added to annual demand and multiplied by the per unit cost.

Lead Time: 3.5 weeks

Unit Cost: We used the 1969 unit cost figures for our computations.

Number of Standard Deviations: Based on 95% probability of not stocking out.

Our corrected figures for EOQ are very similar to those figures calculated in 1969. Some of the products our order is slightly larger, where others are slightly smaller, but they are very close and follow similar trends. The difference is our ROP figures, when compared to their 1969 figures. One reason for the significant difference is that we felt it is necessary for Blanchard Importing & Distributing to begin carrying safety stock. They seemed concerned with the possibility of running out of stock, so our figures include a 3.5 week lead time of safety stock to help minimize this risk.

Question 2: What are the disadvantages of the formal EOQ/ROP system and the actual system used for scheduling bottling runs at Blanchard? Which system do you prefer? What improvements can be made?

The disadvantages of the Fixed Order Process (Q-Model) and the Fixed Time Process (P-Model) are the criteria that Hank should use to validate each one's usefulness and application. While each model affords certain benefits and might allow for different operational strategies, an analysis of the two models and a related comparison of the five products in question can reveal which may best serve the company.

The Fix-order quantity models are designed to be event triggered, where inventory is ordered at the ROP or reorder point. It is a perpetual system, which requires constant inventory monitoring for each product, with every withdrawal and addition. With more expensive products, this system is found to be more favorable as it keeps inventory lower, therefore, controlling cost of goods expenses and other costs. A fixed amount is ordered each time and the time to maintain the inventory is more because of the constant record keeping. It offers greater inventory control of high priced items.

The EOQ model requires a number of assumptions in order to complete the system. The models assumes that demand will be approximately uniform and constant, while lead time remains constant as well. It also assumes that ordering costs and holding costs will remain the same. The model also calls for safety stock, in case demand rises above the assumed level.

The fixed-time period model is limited to ordering goods at the end of a specified period, and so the inventory control system is a periodic assessment. The P-model has a larger average inventory because it must protect against stock The order size at the time of review is not fixed and can vary based upon projected demand and historical demand.

Both multi-period inventory systems have disadvantages and benefits, which can be used to determine which will be applied to each of the five products. The Blanchard Vodka and Gin are both high demand products with reasonable cost. For products that have less demand and are at a lower price, the fixed-time period model (P-Model) would serve best. On further inspection, perhaps some of the products would best be order in a hybrid of the P-Model and the Q-Model.

The reduction of the inventory costs and production costs are necessary to improving the bottom line. Changing over to the Fixed Order Quantity model for the Vodka and Gin products would help reduce inventory costs. Since their blending costs are cheaper than the other three products, timely production on an EOQ schedule would incur less carrying costs that would not be offset by setup costs. Since Bob stated that he and Eliot Wallace had a difficult time predicting demand for gin and vodka, the EOQ system would help them avoid overstock and stock-out costs.

Question 3: What should Hank