Recommendations

During the course of this class we have seen many processes that could potentially apply to any business in general. From Process analysis to sustainability, all the chapters in the book address specific issues in a company’s daily operation. As previously mentioned, for the purpose of this project we decided to look in depth into Scarlet knight’s current inventory management, and the way they handle their relationship with their supplier. As denoted in the book, the most important questions related to inventory restocking, in the mind of a supervisor, point towards lot size and the frequency of the orders. The whole idea behind inventory planning is to satisfy your competitive priorities, whether low cost or quality, the strategy is to comply with the specifications that make your company competitive in the market.

ABC Analysis 

The ABC analysis allows you to plan and control inventory in order to meet your competitive priorities. This Diagram classifies items according to their dollar usage so that managers can focus on items with the highest dollar value. In this process, class A refers to 20% of items that account for 80% of dollar usage, class B refers to 30% of items that account for 15% of dollar usage, and class C represents 50% of items that account for 5% of dollar usage. With the help of this diagram together with your defined competitive priorities, managers are able to decide which inventory system they can benefit from the most. The “P” system or Periodic review, is often used for its convenience and lack of constant inventory reviewing (good for class B and C items); The “Q” system or continuous review is beneficial because it reduces safety stock and fixed lot sizes can result in quantity discounts (good for class A). The first step in our recommendations is to establish an ABC analysis chart for each item in the store.

Class A items: Hard liquor

Class B items: Beer.

Class C items: Mixers, soda, and others.   

  

Continuous Review System

Looking at Scarlet Knight’s liquors and their current inventory system, we have decided to apply the “Q” system to their inventory management of class "A" items. This will better their chances of reducing cost and comply with their competitive priorities. The idea with this system is that time between orders “P” is unknown and the order quantity “Q” is constant, which comes closer to real business scenarios. The systems works in which inventory position (IP) is measured by adding on-hand inventory and scheduled receipts and subtracting back orders. Once "IP" is determined you then compare it to the reorder point (R). When "IP" reaches "R" a fixed quantity of Q is ordered.

When utilizing a continuous review system, the remaining inventory of a SKU is tracked each time a withdrawal is made. These reviews are usually done frequently (daily) and often after each withdrawal. Scarlet Knight Liquors uses electronic cash registers that are linked to the inventory record. This will allow managers and employees to continuously review inventory quickly. This will be beneficial when determining the inventory position.

In the case of scarlet knight liquors the estimated average weekly demand for hard liquor bottles (class A items) is 500 bottles a week with a standard deviation of 100 bottles per week. The lead time from the distributor is 1 week, and the owners of the store are set to have a service level of 92 percent. Usually, the cost per order comes up to $35 with a holding cost of $8 per unit. The following is the integration of the data above to our proposal of using “Q” system:

Whenever the inventory position reaches 641 bottles, order the EOQ of 477 bottles. 

Periodic Review System 

We also recommend that they use a "P" system to manage inventory of class "B" and "C" items. These items together represent for 80% of the total SKUs. The periodic review system is beneficial for these items because of its convenience. It is convenient because replenishment's are made at a fixed interval which allows for standardized delivery times. "B" and "C" orders can be multiple items from the same supplier that can be combined into a single purchase order. This could result in a price break, effectively reducing ordering and transportation cost.  

The idea with this system is that time between orders (TBO) “P” is constant and the order quantity “Q” may change from one order to the next. This system works in which an item's inventory position is periodically reviewed. Which creates a routine that simplifies delivery scheduling. After "IP" is reviewed an order is placed to bring it up to a predetermined target inventory level "T" . "Q" is determined by the difference of "T" and "IP". A new order is always placed at the end of each review and TBO. 

In the case of Scarlet Knight Liquors the estimated average weekly demand for beer cases (class B items) is 750 cases a week with a standard deviation of 100 cases per week. The lead time from the distributor is 1 week, and the owners of the store are set to have a service level of 92 percent. Usually, the cost per order comes up to $35 with a holding cost of $8 per unit. The following is the integration of the data above to our proposal of using “P” system:

Every .78 weeks or 5 days the Scarlet Knight Liquor's manager should order the number of beer cases needed to bring inventory position up to the target inventory level of 1524 cases. The "P" system requires 189 cases in safety stock.