Cameron Balloons

Cameron Balloons is the world's largest manufacturer of hot-air balloons. (http://www.cameronballoons.co.uk)

On average, their factory in the United Kingdom builds one balloon a day but together with their United States factory the company produces on average more than one balloon per day, everyday of the year. And in 1996 the company turnover was almost Ј7,000,000. (http://www.bized.co.uk)

From the operations manager's point of view, inventories are a tool which provide efficient operation of the production facilities. There are no specific level of inventories which are more desirable as they are allowed to fluctuate so that production can be adjusted to its most efficient level. (Meredith & Shafer. 2007)

Effective inventory management is important to the operations department which holds the responsibility to control the firm's inventories. And this control of inventories must be through the value chain which includes the suppliers, the company, distribution centers and the customers.

A lack in inventory information can cause major issues for the company such as an excess in stock. Companies with large inventories such as Cameron Balloons may still run out of materials because they may have too much of one particular material and not enough of others. However, there are certainly benefits gained from improved inventory management but there also must be constant experimenting to reduce inventory investment. (Krajewski, Ritzman et al. 2007)

There are many reasons as to why Cameron Balloons are holding one and a quarter million pounds worth of stock but in general, they support the five operations performance objectives of quality, speed, dependability, flexibility and cost. However, there are negative effects of holding inventory and so it is vital for Cameron Balloons to tightly control or even limit the amount of inventory held. (Slack & Chambers. 2004)

By purchasing materials for storage, Cameron Balloons are therefore ensured that they have sufficient stocks to satisfy their market demand. And this will protect the company against the uncertainties of supply and demand. These buffer inventories serves against unpredictable events that may occur. The amount of inventory held which is over and above the average demand requirement is seen as the buffer stock which is used to meet demand levels in excess of the average. Hence, the more stock held by Cameron Balloons resutls in better customer service as this eliminates problems such as stockouts and backorders. (Meredith & Shafer. 2007)

Holding inventory will also improve the speed of delivery which is essential for fast response to demand and thus, another ingredient to improving customer service. For example. Cameron Balloons must never run out of materials incase there is a sudden rise in demand so an inventory of materials is held. But if the hot-air balloons are unable to be finished by the date demanded by the customer then it is unlikely for the customer to return again so a customer is lost. (Slack & Chambers. 2004)

Input inventories are also vital in the factory workings of Cameron Balloons as it ensures the smooth workings of the processes. This is known as decoupling inventories and they almost act as shock absorbers which change in quantity as it is being used up in stock. The more of these inventories management being used in between stages of the manufacturing and distribution system, the less coordination is needed to keep the process running in order. Without these decoupling inventories then each stage in the production of hot-air balloons would have to work at an identical rate in order to keep the production line flowing smoothly otherwise a failure in one department would cause the entire factory to come to a complete halt. (Meredith & Shafer. 2007)

Inventory also allows Cameron Balloons some flexibility in the processes where the large, specialised production lines are relatively inflexible but the factory holds inventory of every product to respond to short-term changes in volume of demand. In the case of seasonal changes, standard production of the hot-air balloons begins weeks or even months in advance and substantial inventory is held to allow for flexibility for sudden increases in demand. However, for the specialised hot-air balloons this is not possible but the basic materials are held in inventory. (Slack & Chambers. 2004)

Reducing costs are an aim in every organisation and thus another reason for Cameron Balloons to hold stock. Cameron Balloons benefit from bulk-buying in order to get the lowest cost possible for its materials but in return, they also have to be prepared to hold the stock for a period of time. The operations manager for Cameron Balloons decides to make infrequent large orders to reduce the number of orders made and also the associated costs to do with administration and handling costs. Hence the long production runs will help cut down production costs for the company but holding large inventories is a must for this. (Slack & Chambers. 2004)

Other advantages to this are that this enables Cameron Balloons to spread the costs of purchasing the materials over a large number of input units and also to purchase the materials in advance avoiding any price increases that may occur in the near future.

Cameron Balloons are the leader in the hot-air balloons market which is a very competitive market and has suffered from "over-capacity". Thus this is more of a reason for them to be efficient and vigilent on the costs and how much they compare to their competitiors. (http://www.bized.co.uk)

Holding inventories involves significant costs for any company and surveys show that the costs of purcahsing and holding this stock make up for 60-80 per cent of the total cost of a product which in this case are the hot-air balloons. (Brown, Blackman et al. 2001)

The job of an inventory manager is to weigh up the pros and cons of having both high and low inventories and to find a suitable level in between the two that will suit the needs of Cameron Balloons as a company. There are many reasons as to why inventories may be kept low but the main reason is due to the fact that it stands as a temporary monetary investment. And therefore, Cameron Balloons is faced with an opportunity cost also known as the cost of capital which is caused from money being tied up in inventories that could serve other purposes.

The inventory holding cost is the sum of the cost of capital plus the variable costs of holding the stock i.e. storage and handling costs plus taxes, insurance and shrinkage costs. (Krajewski and Ritzman. 2007)

Listed above are the financial impact on Cameron Balloons involved with holding