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CASE STUDY II CASE STUDY IN INVENTORY CONTROL The materials management operations of the Firm PQR, manufacturing electric

c motors, pumps and compressors located about 150 miles north of Kanpur, were recently examined, revealing the following state of affairs. Regular Stores Items: There are approximately 10,000 items including items related to production, maintenance and repairs and office supplies. An analysis of the consumption revealed the following pattern. Items consumed during 1988 Items not consumed at all during 1988 Items consumed during 1989 Items not consumed at all during 1989 No. of requisitions per annum No. of purchase orders per annum 6,300 3,700 6,700 3,300 30,000 approximately 10,000 approximately

An ABC analysis of moving items was made on the basis of: A items Rs.10,000/- and above B items Rs.1,000/- and above Rs.10,000/C items The total annual consumption was Rs.160 lakhs. The analysis showed: No. of Items A 268 B 938 C 5,494 6,700 Percentage of Items 4% 14% 82% Annual usage value Percentage Value in Rs. Lakhs 120 75% 32 20% 8 5% 160

Inventories were analysed on the basis of consumption in 1989, which was regarded as a normal year and the average stocks for 1989, which showed stock position as follows: Items A B C Total Consumption 120 lakhs 32 lakhs 8 lakhs TOTAL 160 lakhs Average Stocks 80 lakhs 16 lakhs 2 lakhs 98 + 25 lakhs N.M.

Each major category was analysed and relation of inventory to consumption was worked out on the following basis: a. b. c. Average stock equal to 12 months consumption represented 100% inventory in terms of consumption. 6 months stock in terms of annual consumption represented 50% and so on. 24 months stock in terms of annual consumption represented 200% and so on.

Analysis showed the following inventory status of major categories: Sr.No. Category 1. 17% 2. 141% 3. 27% 4. 90% 5. 90% 6. 640% 7. 14% 8. 12% 9. 61% 10. 500% 11. 458% 12. 385% 13. 24% 14. 10% 15. 30%

Categories 1 to 8 are production items, 9 to 12 maintenance and repair items, 13 office supplies, 14 and 15 miscellaneous consumable items. The total value of 3300 items, which did not move during 1989 was approximately Rs.25 lakhs. The accounts department had prepared a list of individual items with more than 12 months stock and which represented stocks valued at over Rs.5,000/- at the last annual stock taking. There were 250 such items totaling approximately Rs.47 lakhs. About 100 items represented stocks sufficient to last for 2 years to 5 years and 50 items represented stocks sufficient to last over 5 years on the basis of 1989 consumption. The company was not inventory conscious but it now finds that its inventory carrying charges are 20% per annum. They have also not been able to dispose off non-moving items or excess stock of items consumed slowly, partly due to the managements policy of trying to get very high prices for the surplus and excess materials, and also because all decisions for disposal had to be taken at top management level. Another important reason for not disposing was due to production departments forecast year after year that the stores will be consumed in the following year. The company has a foreign collaboration. It sub-contracts heavily manufacturing only 25% of the components at its own works. By value 67% represents the subcontracted components, and 33% manufactured components. Now the company is about to expand manufacture. By 1990-92, it will produce about Rs.200 lakhs worth of components. At present, the quality, delivery and price of the sub-contracted components are not satisfactory. Because of heavy rejections and irregular delivery, very large stocks of sub-contracted components had to be kept. As regards price, the company has been paying higher prices every year for both sub-contracted and purchased materials. Only a few items have been bought at 1988 prices.

The company imports large quantities of raw materials. Generally about 6 months requirements are shipped at a time. The company has a heavy inventory of imported raw materials. It has now been assured by the Government of India that it will be allowed to import more raw materials for the next couple of years in consideration of their export program. The management is, however, worried about the high inventory and the high cost of production. For the last 2 years, it has paid no dividends and last years Balance Sheet showed a loss. You have been called in as an expert adviser by this Company to reduce the cost of materials and the inventory. How would you tackle the problem and what would be your recommendations? Make additional assumptions, as necessary.