good shephard home

8/14/2019 Good Shephard Home

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Good Shepherd Home


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ase Details The Good Shepherd Home is a long-

term care facility with an 80-bedcapacity

Mr. Scott, the administrator, is

concerned about rising food costs Mr. Scott decides to investigate food

services, due to increased in price

significantly.


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He has looked at 100 stock items and isconsidering tighter controls on the 40

stock items for which 400 order-units(dozens, cases, pounds, etc.) havebeen ordered.

Of particular interest is a problem withperishable good, bread.

Bread demand is uneven.

Fresh bread is delivered daily and isused that day for table meal serviceonly.


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-T h e d a y o ld b re a d is sa lva g e d fo r.d re ssin g a n d sim ila r d ish e s

S co tt e stim a te s th e co st o f b re a d to b e. / -$ 0 7 5 lo a f a n d th e co st o f d a y o ld b re a d

. / .to b e 0 2 5 lo a f

. M r S co tt is of th e o p in io n th a t b e in g-o u t o f b re a d it co st a d o lla r p e r lo a f

sh o rt in g o o d w illlo st fro m o u r

.re sid e n ts T h e fo o d se rvice s su p e rviso r h a s a/sta n d in g o rd e r fo r 3 0 lo a ve s d a y a n d.tw ice th a t a m o u n t o n S u n d a y


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The supervisor spends less than $5/day onfood for each resident on food

The supervisor says that she knows withcertainty that demand for hamburgerover a menu cycle is 200 pounds.

Costs : $12 to place an order and 20percent of the hamburger cost to carry

hamburger in inventory. Hamburger costs $1.55/pound.

Good Shepherd currently ordershamburger every week


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Typical Inventory Items

Number ofStock Items

QuantityOrdered (inunits)

Total Cost (in $)AverageInventory (in $)

3 50 3,500 1,200

12 150 2,500 900

20 200 1,500 600

40 400 2,000 20025 200 500 100


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The ABC classification process isan analysis of a range of items,

such as finished products orcustomers into three categories:

A - outstandingly important:

comprising items with a large dollarvolume.B - of average importance: comprising

items with moderate value andmoderate dollar volume.C - relatively unimportant as a basis

for a control scheme: comprisingitems with a lar e volume and small


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ABC Classification

Classification

Item no Monthly $usage

% of total$ wage

No ofitems

% of totalno ofitems

A 3, 12 6000 60 2 40

B 40 2000 20 1 20

C 20,25 2000 20 2 40


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ABC Classification

A-large $ items: item comprise 60%of total $ volume

B-moderate unit and $ value: itemcomprise of 20% of the total $volume.

C-large number of items but small $

value: item comprise 20% of total $value.


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Assuming

Mr. Scott is concerned with the 40item

because it involves a perishable itemie., Bread

and therefore he wishes to exercisegreater

control over it than the group A.In fact we can say that for Mr Scott

these 40 stock are graded as A


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Critical Fractile

Single Period Inventory Model.

Critical Factile is the service levelthat maximizes profit for theperishable goods case.

It is the ratio of the shortage(understock) cost and the sum of

shortage and overstock costs Critical Fractile (CF) = Cu / Cu + Co


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Critical FractileCalculation

Cost of fresh bread - $0.75/loaf

Cost of day old bread - $0.25/loaf

Understock cost = $1

Overstock cost = $ 0.5 (0.75 0.25)

Critical Factile = 1 / 1 + 0.5 = 0.66


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( )B re a d D e m a n d in lo a ve sD a y W e e k1 W e e k2M o n 2 0 1 9

T u e 1 5 2 7 W e d 2 1 2 0T h u 3 0 3 2Fri 3 1 2 7

S a t 1 9 1 6S u n 4 2 3 9


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For SundayRange = 3Economic order quantity (Q) = 41On Sunday 41 loaves is the ideal

quantity to be ordered.

Mean weekday Bread demand =23.083 23(approx)

Standard Deviation = 5.65


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% W e ca n b e 6 7 certa in th a t th ed e m a n d fo r b re a d lo a ve s w ill n o t

.e xce e d 2 6 o n w e e k d a y s % W e ca n b e 8 0 certa in th a t th e

n u m b e r o f u n its sold w ill n o t

.e xce e d 2 8 o n w e e k d a y s


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ComparisonStockout cost

Previously 65.5 $

Now 45 $

A d e clin e o f . %1 2 9 .in stockout cost


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Cost TradeoffsMultiperiod Inventory System.Objective in inventory control is to find

the minimum cost. To calculate thatwe need to consider all the following

costs.

Total Annual Relevant Cost = Cost of

the Items + Procurement Cost +Carrying Cost + Stockout Cost.


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Cost of Item:The cost of value of the item is usually its

purchase priceThat is the amount paid to the supplier for

the item.E.g.: from the case hamburger cost is

$1.55/pound

Procurement Costs:

Costs of placing an order or setup costs ifthe item is manufactured by the firm

E.g.: $12 to make an order for hamburger


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Carrying (holding) Costs:

Carrying or holding costs are the

costs of maintaining the inventory.E.g.: 20% p.a. of the hamburger cost .

= 0.20 x 1.55 / 26

= 0.01192 for 2 weeks

Stockout Cost:

Stockout cost are associated

with demand when stocks have beende leted,


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As theOrdering

costdecreases

the Carryingcost

.increases

It is saidthat there

is a casttradeoffbetween the

.two

EOQ


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Economic Order Quantity

EOQ is essentially an accountingformula that determines the pointat which the combination of order

costs and inventory carrying costsare the least.


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Economic Order Quantity(EOQ) Forthis case

Q* = (2 x D x S/IC) = [2 x 200 x 12 / 0.011] = 634.57 poundsWell as the demand is just 200 pounds

per week and hamburgers timeduration is only 2 weeks (Assumed)

we cannot order such a largequantity. So the ordering quantityshould be equal to demand i.e. 200

pounds


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Total Cost

Total cost = Procurement cost x No.of orders + Carrying cost of 1 unit xAvg. no. of units carried

TC = S x D + IC x Q Q 2


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TC = 12 x 200/200 + 0.011 x 200/2 = 13.192

TC = 12 x 200/100 + 0.005 x 100/2 = 24.298

. %5 7 0 of d e cre e sin to ta l

.cost


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Suggestion to Mr. Scott

Minimize the number of orders byordering for a entire meal cycleinstead of each week.

Implement proper inventory controlby making use of critical fractile.


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Thank

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