Quality and Delivery

Chapter 6 - Quality and Delivery

Q1: Of what interest is ABC analysis? (pg. 196-197)

A1: Also know as the 80/20 rule, or Pareto curve, it is the theory that 80 percent of all purchases amount of only about 20 percent of the total dollars spent. ABC analysis can be used to classify items to identify where time spent would have best value. The analysis of purchase value is based on unit value, annual volume and annual value.

Class % of total items purchased % of total purchase dollars

A 10 70-80

B 10-20 10-15

C 70-80 10-20

Typically the smaller, less important item creates the most amount of work and nuisance out of proportion to their dollar value and importance. By classifying items that have the best potential for savings, purchasing can discover where to spend the time and add the most value.

It is common to identify C items, and deal with those items by carrying inventories, creating blanket agreements or other strategies that reduce administrative and repetitive work. It has the greatest benefits to concentrate on the A & B items. Simply put, is it better to save 10 percent on a $100 purchase ($10) or save 10 percent on a $1,000,000 purchase ($100,000).

Q3: Why is it expensive to carry inventories? (pg. 202-203)

A3: Investment of the money to carry inventory is money that can't be used as working capital, or invested in other ways that may generate interest, therefore resulting in lost opportunity. Also are the direct overhead costs such as:

i) Handling charges

ii) storage space costs

iii) costs of equipment, labour and other operating costs

iv) inventory risk costs, such as spoilage, breakage, theft or obsolescence.

Annual cost of carrying inventory is an estimated range from 25 - 50 percent of the value of the inventory. This can be substantial and encourages organizations to continually review and reduce the carrying of unnecessary inventory.

Q4: In a typical fast-food operation, identify various forms and functions of inventory. How could total investment in inventories be lowered? What might be the potential consequences? (pg. 204-209 - Figure 6-5)

A4: Five basic forms of inventory are:

i) raw materials, purchased parts and packaging =frozen beef patties

ii) work in process = fries in the deep fryer

iii) finished goods = burger/fries

iv) MRO items = oil for deep fryer

v) Resale items = combo meal

Five basic functions of inventory are:

i) Transit = getting meat out of freezers to cooking stations

ii) cycle (EOQ, lots, etc) = orders placed daily and weekly

iii) Buffer (uncertainty, risk level fluctuations) = additional perishables on hand to ensure demand is met which may result in spoilage

iv) Anticipation (price change, shortages, seasonality, capacity) = additional chicken nuggets for monthly sale

v) Decoupling (inventory in between stations) = cheese slices waiting to be added to burgers

Lower investment in inventory:

i) ABC analysis (lower inventory of beef, buy pickles in large bulk)

ii) JIT (have perishables delivered daily)

iii) Supplier