Logistics/Supply Chain/logistics and supply chain management
samuel wrote at 2013-11-21 07:13:07
Asere Milling Company
Kofi, distribution manager for Asere Milling, has become increasingly aware that the company
has a major problem as it continues to try to reduce inventories while maintaining the levels of
service its customers have come to expect.
Company and Product
Founded in 2005, Asere Milling has provided high-quality bakery flours to commercial bakeries
as well as to the consumer market. While commercial customers tend to have consistent buying
patterns as well as brand loyalty, Asere has found that consumers have minimal loyalty but also
generally prefer known names over the store brands. Demand is highly seasonal, with the
annual peak occurring just before Christmas and slacking off dramatically during January and
February. To offset this, both Asere and its major supermarket chain accounts run special deals
and sales promotions.
Production planning, located at the Asere headquarters has responsibility for controlling
inventory levels at the plant warehouse at the Industrial Area as well as at the three
distribution centers located at Accra, Kumasi, and Takoradi. Planning has routinely been based
on past history. No forecasting is performed, at least not in a formal sense. Distribution Centers
(DCs) are replenished by rail from Tema; and lead times are typically seven days, with fortyeight
to fifty-four pallets per car depending upon the type used.
Should emergencies occur, eighteen pallets can be shipped by truck with a one-day transit time.
Recently Asere has experienced two major stockouts for its consumer-size five pound sacks of
bleached white flour. One of these was due to problems in milling operations; the other
occurred when marketing initiated a "buy one, get one free" coupon promotion. Since these
events, planning has become overly cautious and errs on the side of having excess inventories
at the DCs. Additionally, two other events have affected DC throughput:
(1) implementation of direct factory shipments for replenishing the five largest supermarket
chains, and (2) a price increase making Asere flour more expensive than its national brand
competitors, such as Takoradi Flour.
Of the 1,500 pallets in the Accra DC, Asere shows only 396 pallets for open orders. This has led
the company to use outside overflow storage, where there are another 480 pallets. Flour is
easily damaged; hence, Asere prefers to minimize handling. Overstocking at the DC alone costs
$1.85 per pallet for outside storage, to which must be added $4.25 per pallet for extra handling.
Similar scenarios are being played out at the other DCs as well.
Esi, director of distribution services, has developed the following information:
Annual demand: 36,000 flours
Flour value (price): $40
Inventory carrying cost: 25 percent
Order cost to replenish inventory: $200
In-transit inventory carrying cost: 15 percent
Order cycle time using rail: 4 days
Order cycle time using motor carrier: 2 days
Rail rate: $1.00 per kg
Motor rate: $1.25 per kg
Unit weight: 50 kg per flour
Pallet: 500 kgs of flour
Kofi has been contemplating various approaches to solving the inventory issue. Clearly, product
needs to be in place at the time a consumer is making a buying decision, but Asere cannot
tolerate the overstocking situation and the stress that it is putting on facilities and cash flow,
Kofi's first thought is that a better information system is needed, one that not only provides
timely and accurate information but also extensively shares that information throughout the
organization. Several questions immediately come to his mind; however, he needs additional
information prior to coming to any solutions.
Case Study Questions
1. Evaluate the alternative solutions being considered by Kofi.
2. What is the economic order quantity (EOQ)?
3. What is the total cost (not considering transportation-related costs) of the EOQ?
4. What is the total cost using rail transportation?
5. What is the total cost using motor carrier transportation?