Fletcher Company Case StudyEssay Preview: Fletcher Company Case StudyReport this essayExecutive SummaryFletcher Company recently is studying the operation area. And the new hired CFO is considering replacing the current inventory system with a type of just-in-time inventory system.
After analysis, the company found that if it implements “just-in-time” inventory system, the present value of the total cost would be reduced, WCR/S ratio would decrease, and the company can have more cash free from the inventory balance to do all the other things a company needs done. Thus implementing “just-in-time” inventory system might be a better choice.
But “just-in-time” inventory system also has some risks. The biggest risk is that if the company can not make an accurate forecast of the units required well in advance, the supplier will not have enough time to plan production, than the company may suffer from inventory shortage. Besides, transportation planning also is an issue.
CalculationCalculation of order cost per orderSince Annual Order Cost = 1600Number of orders = 5Thus Average Order Cost = 1600/5= 320Calculation of operational holding cost per crateSince Total Holding Cost= Warehouse Rental Fee + Annual Insurance Bill= 120000 + 5000= 125000Average Inventory= Order quantity/2 = 750/2= 375Thus Operational Holding Cost Per Crate = 125000/375= 333.33Calculation of the annual cost of current inventory management systemPayment DayPresent value factorCash flowPresent value holding and ordering costsPresent value of purchase cost0.9819(750*8000=)600000058913050.9539600000057231160.9274600000055642630.9023600000054139900.8786600000052716200.8561(125000+1600=)126600108381PV of Total Cost27972675Since annual opportunity cost = 15%, payable credit period=45, order quantity=750, cost per unit=8000, total holding=125000, ordering cost=320*5=1600Calculation of the annual cost of the proposed systemPayment DayPresent value factorCash flowPresent value holding and ordering costsPresent value of purchase cost0.9819(110*8000=)8800008640580.97798800008605940.97408800008571570.96988800008534080.96568800008496920.96188800008463410.95808800008430170.95398800008393900.94988800008357950.94618800008325530.94248800008293360.93848800008258260.93458800008223450.93098800008192070.92748800008160920.92358800008126930.91978800008093220.91628800008062820.91288800008032640.90918800007999710.90538800007967050.9020880000793758
Dealing with the Problem of Order Cost
A good way to deal with a problem of order cost is to deal with ordering price. At some point when a crate is in fact being sold, someone either has to order the crate itself or some other order will be made for the crate. It will cost a significant amount for every order made, so you should plan your orders accordingly. Note that when designing a crate with a new capacity, your demand is being increased by the order or it will become harder to be able to deliver the crate. If the demand is large (say 10 orders, for example), this is an issue, but will be resolved with a few new orders per day. The best time to deal with a problem of order cost is when you have a supply of supply to use as the need arises.
With that in mind, in order to avoid too much pressure on the order you’re making, you might as well make it a good order in the first place!
Let’s say I’m only trying to be efficient with a problem of order cost, where $(10) * 15 = 10 orders (because one order is being made for 15 days). This is a good idea, because using $(10) = 15 crates, the need for orders above 100 are really pretty small. But if you want to go higher, using $(45) * 10 = 1 million orders will be an excellent strategy, because each order takes around 8 hours to be shipped. (Because the order comes with an estimated shipment time of about 12 hours to complete). That means ordering time is around 45 days so a time estimate is 3 weeks at most, or 3 months.
So it’s not that much of a concern that you need more than 10 order orders. It’s also not ideal. If you have 1 million orders, you have to order for just 100 or so, and the cost increases by half, so it’s not that big of a deal (at least not in my experience). With any number of orders made, there should be a higher risk you will get lost and not get the correct type of order you want.
With order of 10, if you have 1,000, then ordering time is now 45 days, and I can handle one order for 15 hours. If I were ordering 10 orders, I would have to order until my current order is 30 days away (but it’ll never come to that point).
If you’re dealing with the volume level of an order, where ordering time is now 40 days away, it makes little sense to make more orders. In some cases, order time is now 3 to 5 days