Problem: Tasty Treats

Tasty Treats is a distributor of candy and snack products serving customers in a six state region of the midwestern United States. Bill Jones, chief operations officer, has been concerned about inventory levels and inventory performance at Tasty Treats for quite some time. In speaking with Jim Busfield, chief executive officer of Tasty Treats, Bill voiced some of his concerns. "Jim, we carry over 5,000 different items in inventory. I have a feeling that we just don't have a good handle on the proper approach to managing this part of our operations. We don't have any real analysis that tells us how much we should carry of each item. We just use simple rules of thumb to determine how much we should order from our suppliers. For example, we sell an average of 100 cases of Chocolate Chewies every day. When we order Chocolate Chewies from our supplier, it usually takes about 10 days for us to get the order. So, we order 1,000 cases of Chocolate Chewies every 10 days. I also try to keep an extra 200 cases on hand just in case something unexpected happens. Sometimes we run out of stock anyway and sometimes I look and see an enormous number of cases of Chocolate Chewies on hand. The same basic approach is used for every item we sell. There's got to be a better way." Jim briefly thought over Bill's concerns before he replied. "I think you're right, Bill. As you know, my background is in finance, not operations, but I can tell you that we have a lot of money tied up in inventory and we spend a lot of money not just in buying it but in maintaining it, too. We pay insurance, taxes, and a lot of other costs just because of the amount of inventory. If we manage it better, we may be able to free up a lot of capital, too. There has to be a more sophisticated approach than what we are doing. I tell you what let's do.

We have a summer intern who is majoring in supply chain management at State University. Let's turn her loose on this project." Jim and Bill called the intern, Rachel Atkins, into the office and explained the situation to her. She happily accepted the assignment. She explained to Bill and Jim that she would need to gather a lot of information from them in order to complete the assignment. They agreed that she could have access to any data she needed and that they would tell other managers at Tasty Treats to cooperate with her in the project. First, Rachel conducted a detailed analysis of demand for the past two years. For each of the 300 days per year that Tasty Treats ships to customers, she found that Bill was correct in saying that demand averaged 100 cases per day. However, in fact, the demand pattern had a standard deviation of 8 cases per day. She also looked at the supplier's performance and found that the 10-day lead time was a good average, but it also varied and had a standard deviation of 2 days. From the supplier of Chocolate Chewies, Rachel learned that Tasty Treats paid $25.00 per case for Chocolate Chewies. The supplier's sales representative then remarked, "I've always wondered why Tasty Treats orders 1,000 cases every time. They've never asked about any of our discounts. If they order 3,000 cases, our selling price drops to $24.50. That's a 2 percent discount."

Rachel had several discussions with Jim and Bill. After explaining to them what "order costs" and "inventory carrying costs" consist of, they provided her with their estimates of each. Jim suggested that she should use 15 percent as the annual inventory carrying cost. Bill determined that a good estimate of order cost would be $100 per order. As her final step in gathering information, Rachel talked with Jim, Bill, and the sales staff about the importance of customer service. She explained about service levels and stockouts, and their importance in inventory management. The sales staff was insistent that a 99 percent service level policy was needed. Jim and Bill were a little hesitant to accept that and suggested instead that Rachel consider a 95 percent service level. Rachel commented, "I'll do both and we can see what the difference is." Jim said, "That'll be great, Rachel. I'm scheduling a meeting of all senior managers for next Tuesday to hear your report. I'm looking forward to it."

Question

What recommendations should Rachel make in her presentation to Tasty Treats senior management?