Energy Portfolio: Sapphire Energy
Sapphire Energy is responsible for providing reliable electric service to customers in and around the areas of Ballarat, Bendigo, Geelong, Mildura, Melton, Sunbury, Shepparton, Traralgon, Wangaratta and Wodonga. One material used extensively to provide this service is the 1/0 AWG aluminium triplex cable, which delivers the electricity from the distribution pole to the meter loop on the house.
The Eastern Power storeroom procures the cable that this company will use as part of its contract with Sapphire Energy. For the coming year, Eastern Power will need 155,000 metres of this service cable. Since this cable is only used on routine service work, practically all of it is installed during the five normal work days. The current carrying cost of this cable is $1.35 per metre. Under the present arrangement with its supplier, the Eastern Power storeroom must take one-twelfth of its annual need every month. This agreement was reached in order to reduce lead time by assuring their customer (i.e. Sapphire Energy) a regular spot in the supplier's production schedule. Without this agreement, the lead time would be about twelve weeks. No quantity discounts are offered on this cable; however, the supplier requires that a minimum of 4500 metres be on an order. The Eastern Power storeroom has the space to store a maximum of 90,000 metres of 1/0 AWG aluminium service cable.
Associated with each cable shipment are ordering costs of $50, which include all the costs from making the purchase requisition to issuing a check for payment. In addition, inventory carrying costs (including taxes) on all items in stores are considered to be 10% of the purchase price per unit per year.
Being a government-regulated, investor-owned utility, both the Victoria's Essential Services Commission and the Laburnum Group shareholders watch closely how effectively the business, including inventory, is managed.
Your task:
You have recently been hired as the new Inventory Controller at Sapphire Energy. You are asked to address the following questions:
1. Evaluate the effectiveness of the current ordering system.
2. Can the current system be improved?