1. Prepare a table-based ABC analysis of usage value. Classify as follows: A-items: top 20% of usage...

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Question:

1. Prepare a table-based ABC analysis of usage value. Classify as follows:

A-items: top 20% of usage value

B-items: next 30% of usage value

C-items: remaining 50% of usage value

2. Calculate the inventory weeks for each item, for each classification, and for all the items in total.

3. Does this suggest that Pierre Lomouche?s estimate of inventory weeks is correct?

4. Based on the sample, analyze the underlying causes of the availability problem described in the text.

5. What recommendations would you give to the company?

Founded almost 20 years ago, supplies4medics.com has become one of Europe?s most successful direct mail suppliers of medical hardware and consumables to hospitals, doctors? and dentists? surgeries, clinics, nursing homes and other medical-related organizations. Its physical and online catalogues list just over 4,000 items, categorized by broad Applications such as ?hygiene consumables? and ?surgeons? instruments?. Quoting their website:

?We are the pan-European distributors of wholesale medical and safety supplies ? We aim to carry everything you might ever need; from nurses? scrubs to medical kits, consumables for operations, first aid kits, safety products, chemicals, fire-fighting equipment, nurse and physicians? supplies, etc. Everything is at affordable prices ? and backed by our very superior customer service and support ? supplies4medics is your ideal source for all medical supplies. Orders are normally dispatched same-day, via our European distribution partner, the Brussels Hub of DHL. You should therefore receive your complete order within one week, but you can request next day delivery if required, for a small extra charge. You can order our printed catalogue on the link at the bottom of this page, or shop on our easy-to-use online store.?

Last year turnover grew by over 25 per cent to about 120 million euro, a cause for considerable satisfaction in the company. However, profit growth was less spectacular; and market research suggested that customer satisfaction, although generally good, was slowly declining. Most worrying, inventory levels had grown faster than sales revenue, in percentage terms. This was putting a strain on cash flow, requiring the company to borrow more cash to fund the rapid growth planned for the next year. Inventory holding is estimated to be costing around 15 per cent per annum, taking account of the cost of borrowing, insurance, and all warehousing overheads.

Pierre Lamouche, the Head of Operations, summarized the situation faced by his department: ?As a matter of urgency, we are reviewing our purchasing and inventory management systems! Most of our existing re-order levels (ROL) and re-order quantities (ROQ) were set several years ago, and have never been recalculated. Our focus has been on rapid growth through the introduction of new product lines. For more recently introduced items, the ROQs were based only on forecast sales, which actually can be quite misleading. We estimate that it costs us, on average, 50 euros to place and administer every purchase order, since most suppliers are still not able to take orders over the internet or by EDI. In the meantime, sales of some products have grown fast, whilst others have declined. Our average inventory (stock) cover is about 10 weeks, but ? amazingly ? we still run out of critical items! In fact, on average, we are currently out of stock of about 500 SKUs (Stock Keeping Units) at any time. As you can imagine, our service level is not always satisfactory with this situation. We really need help to conduct a review of our system, so have employed a mature intern from the local business school to review our system. He has first asked my team to provide information on a random, representative sample of 20 items from the full catalogue range, which is copied below.?