Introduction It is early Friday afternoon and Jack Johnston, Manufacturing Manag

Question

Introduction

It is early Friday afternoon and Jack Johnston, Manufacturing Manager is looking at the

production requirements for next week. He is dreading the regular trip to the warehouse

to locate materials to keep production going, especially after the Warehouse Manager

was just in his office complaining that the warehouse was too small and overflowing to

the point that will not be able to accept any additional production output.

Background

Mitchell Manufacturing Corporation manufactures and markets a variety of disposable

consumer products including several different types of pens and shavers. Jack is aware

that the warehouse is full of a wide variety of packaging products that the marketing

the department uses the promotional ideas it is constantly dreaming up to promote the

Mitchell product lines.

Mitchell has an aggressive sales team, eager and able to move large volumes of

merchandise through its many marketing campaigns. Jack also knows that customers

appreciate the company’s distribution network which the Mitchell people take pride in for

its delivery record and high levels of customer service.

The Warehouse

Johnston is frustrated, the warehouse full of packaging materials means another trip to

help the warehouse personnel sort out which promotional material is too be used for the

upcoming production set-up(s). Each product Mitchell sells has five or more promotional

variations that can be used, many of which are left-over components from previous

promotional runs.

The warehouse is also on the radar of Mitchell’s Financial Manager Paul Fleming.

Fleming is frustrated that production levels are not producing the expected operational

profits, and is insisting that detailed cost analyses be completed prior to the approval of

any new product configuration. Fleming is requesting that the cost analysis includes

exacting measurement practices in production set-up costs, production usage,

production losses, transportation costs, overhead allocation and warehousing costs.

Déjà vu

As Johnston was reviewing the production plans and thinking about the next trip into the

warehouse, the door opens and Frank Grenfell storms into his office, demanding that

they address the overcrowded warehouse facility. “We are overflowing in the warehouse

and can no longer accept additional production output. I am sick and tired of working in

overcrowded conditions daily. This last batch of promotional runs is the straw that broke

the camel’s back.” After a deep breath, Grenfell calmed down and described that the list

of items kept in inventory has grown to over 1,000 items as each promotional variation

becomes a separate stock keeping unit. Grenfell feels that it now necessary to rent

additional warehouse space to store future production output.

Johnston agreed that the concerns bought up by Grenfell were valid and that they

needed to address the issue, so he quickly calls a meeting of Grenfell, Fleming and

himself to attempt to resolve the issues

A quick analysis reveals that the inventories are recorded separately for every single

item in the inventory database. On the other hand, financial records lump all the

inventory items together of packaging materials related to the same products. They

determined that this practice virtually makes it impossible to determine the value of

meanwhile obsolete items. Similarly, they realize that the same situation exists with

regards to finished goods inventories.

The three men come to the conclusion that the best method of resolving the

overcrowded warehouse problem is to ask Mitchell’s marketing and sales department

for assistance. All salable items it was felt could be disposed of at discounted prices,

and all the remaining obsolete materials could be discarded and written off. Where

possible Grenfell and Johnston would recycle the obsolete materials appropriately. This

was going to be a painful exercise, however, as packaging costs represent a significant

percentage of total product costs.

The Purchasing Department

Mitchell’s purchasing department had long played a major role in determining product

costs and Johnston knew that the expertise they possessed could be of assistance in

determining the true costs of products. In conjunction with the disposal and sell-off,

Johnston knew that they had to examine all aspects of costs and as Purchasing is also

responsible for the inventory budget he asks the senior buyer Louise Dawson for

packaging materials to analysis and compile costs on all the packaging components. In

particular he asks Louise to search for any hidden costs that were not included in past

computations, as he suspects the hidden costs may include inventory carrying costs.

1. What is your opinion of the group’s plan for clearing out obsolete inventory?

a.If you do not agree with the proposal, what would you do to resolve the

warehousing space problem?

2. How would you prevent these space problems from occurring again in the future?

3. Make a list of the types of inventory carrying costs that you think apply in this

case. Which of these can be controlled by effective purchasing policies and

practices?

4. Does the responsibility for establishing inventory budgets and controlling

inventories conflict with the responsibility for negotiating favorable purchasing

contracts? Why or why not?

Explanation / Answer

1.My opinion for groups plan for clearing doubt obsolete inventory is that it is always better to clear obsolete inventory at the earliest time possible to avoid additional inventory storage cost. So instead of discarding obsolete inventory it is better to recycle the inventory. This would also improve the reputation of the company. As by recycling we are also displaying our responsibility towards environment. And the saleable items can be sold to customers at discounted prices for faster sellout.

2. The space problem can be prevented from occurring in future by maintaining optimum inventory and safety stock. Forecast the demand of the inventory item and accordingly stock the items. In case the inventory piles up report it immediately to the management in order to take appropriate control action. There needs to be better coordination between purchase department and marketing and sales department and the warehouse manager. An inventory management software should be maintained that would help in taking proper decision at the right time regarding inventory.

3. Types of costs are
Ordering cost, carrying cost which includes cost of capital and inventory storage cost, stock out cost, cost of replenishment, sales discount and other cost.

Ordering cost and carrying cost and stock out cost can be controlled by effective purchasing policies and practices.

4. Yes responsibility for establishing inventory budget and controlling inventory conflict with the responsibility for negotiating favourable purchasing contract. Because most of the time the purchasing cost is reduced with large quantities of purchasing items due to discounts associated with bulk purchase. But this in turn increases the inventory management cost. Hence there is a conflict between maintaining inventory budget and negotiating favourable purchasing contract.

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