Posted: May 1st, 2022

The purpose of this exercise is to discuss the situation facing the manager

The purpose of this exercise is to discuss the situation facing the manager and help her determine an inventory ordering policy from the information given.

Keith Mason owns three bars in Oceanside CA located on the boardwalk. In September 2019, Keith hired Susan Warton as the Business Manager to take care of accounting and inventory. Her salary is $40,000 which works out to about $20 per hour.

After her first six months at work, Keith is dissatisfied with her performance. Susan seems to be spending so much time taking care of the inventory that the books are always late. Although Susan has been using standard ordering policies (set in 2011), she claims that very often she finds herself dealing with rush orders to avoid stock outs. In most cases, rush orders mean compromising on quality and settling for lesser known brands. This results in a number of dissatisfied customers, and it also meant that Keith still had to take care of many accounting tasks. He had felt that with Susan taking care of running the bars, he would have more time for his family and fishing. Before making a decision on whether to retain Susan, Keith thought he should get another opinion on the inventory problem.

Megan Mason (Keith’s niece) has just finished a course in Operations Management. Keith offered to sponsor Megan’s summer vacation in Oceanside if she would help to study the ordering policies for the bars. Realizing that the inventory policies should be based on demand, Megan first studied the weekly demand for 2018-2019 and forecasted the annual demand for the major items based on 52 weeks per year. Three of these are listed on the next page.

Discussions with Susan revealed that orders were placed for each item when it reached its reorder point. She used the order and reorder points estimated by the previous stock manager. Susan estimated that orders must be placed three weeks in advance in order to purchase and receive the correct brand. She spends about 30 minutes checking stock each time an order is placed. A study of the inventory records indicates that about 3% of the material are discarded due to spillage and broken bottles. Keith Mason pays 9% interest on the debts for his business.

Product Annual Demand (Bottles) Unit Cost ($) Current Order Quantity Current Reorder Point
Vodka 1630 3.20 200 40
Scotch 980 8.62 100 40
Rum 325 5.05 50 20

1. What is the cost of placing an order?

2. What is the holding cost for each type of liquor?

3. What is the optimal ordering policy (i.e., order quantity and reorder point) for each product? Assume a safety stock of 6 bottles for each item.

4. What information should Megan provide Keith to convince him that the above policy is an improvement on the current policy used? Explain why the new reorder point is better and show a comparison of the costs for the current and new order quantities for vodka, scotch, and rum.

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The goal of this exercise is to examine the manager’s situation and to Help her in determining an inventory ordering procedure based on the facts provided.

Keith Mason owns three boardwalk bars in Oceanside, California. Keith hired Susan Warton as the Business Manager in September 2019 to handle accounting and inventory. Her annual compensation is $40,000, or around $20 per hour.

Keith is unsatisfied with her performance after six months on the job. Susan seems to be spending so much time taking care of the inventory that the books are always late. Susan claims that despite following normal ordering standards (established in 2011), she frequently deals with rush orders in order to avoid running out of stock.

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