Appendix 3: Appendix 3: Perfect Pizza 1994 volume planning
2. What does the operation do to make queuing relatively painless? What else could it do?
We already touched on ways in which Madame Tussaud’s could increase its revenue and manage its customers’ expectations during the queuing time. However, in addition it could also provide more tangible benefits. For example, in periods when demand was particularly heavy it could distribute free ice cream, thus delighting its customers. It could also organize entertainment, which relates to what the customers will see inside. In periods of fine weather for example, it could perhaps move some wax figures outside so that the photographers could take photographs during the queuing period.
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C H A P T E R 1 2
Inventory planning and control Teaching guide
Introduction
This is a relatively quantitative chapter. This is partly because the various quantitative models of stock control have within them the assumptions upon which we base most inventory management. Therefore, working through the mathematics of stock control we are implicitly establishing the key cost drivers and principles of the subject. The other reason for taking a more quantitative approach is that it is traditional. Most textbooks in this area are expected to have the inventory models covered in this way. Perhaps this is a mistake we all make as teachers. It may be convenient to teach the mathematics of stock control, but how relevant is it?
This is a question we can only decide individually. Our approach is to limit the use of mathematical models. So, for example, we hardly ever go beyond establishing the basic economic order quantity (EOQ) formula. The important point is to examine the assumptions within the models. This allows one to look at the various cost elements affected by inventory, examine issues such as cost of capital, look at how (for example) the cost of keeping inventory might affect stock control decisions and so on.
Key teaching objectives
• To define what we mean by inventory
• To identify why inventory occurs in different types of operation and in supply chains generally
• To establish the underlying assumptions and cost drivers of inventory through the use of order quantity formulae
• To establish some of the practical difficulties of managing inventories in a dynamic sense Exercises/discussion points
• Exercise – An exercise which we have found useful is to set the class the task of investigating how much money is tied up in stocks in various companies. The easy availability of company accounts on the Internet now makes this task much more feasible.
Get them to compare different types of companies and thus identify the kinds of organizations where stock control is particularly important from a financial point of view.
• Teaching tip – Lead a discussion on how companies that have very large inventory costs manage. Examples such as gold processors and supermarkets are useful here. In some ways
both of them have stock costs that are so large that they need to be treated separately from the day-to-day operations management costs, which the operation incurs. For example, in many gold processors and precious metals companies the value of the gold and other metals does not even appear on the company’s financial statements. It would dwarf everything else.
It is treated as belonging to a customer. The company then performs a service on the customer surrogate (the gold).
• Exercise – The dynamics of stock control lend themselves to very simple classroom- based games. For example, give a forecast to the class of how many goods are likely to be sold period by period. Also, indicate the costs of placing an order and holding stock. Devise a simple form that allows the class (in groups) to make ordering decisions and keep track of their stock levels and costs. Then (fairly rapidly) simulate a period of time, usually 20 or 30 periods, by taking values around the forecast for each period (but not exactly as forecast of course). The winner is the group with the lowest costs and the highest customer service. (It may be necessary to put an artificial cost on stock-outs to make the evaluation simpler.)
• Exercise – Make an exercise out of the National Blood Service ‘Operations in action’ piece at the beginning of the chapter. For example, one could ask the following questions.
What are the factors that constitute inventory holding costs, order costs and stock-out costs in a National Blood Service?
Holding costs – will include costs associated with storage (such as freezing) and any wastage because of outdated or mismatched blood types.
Order costs – include the cost of collecting the blood in the first place, both on a regular basis and on an emergency basis when blood is needed at short notice.
Stock-out costs – these may be relatively small if a substitute blood group can be used, higher if blood has to be obtained from a neighbouring area because it is unavailable locally, or very high indeed if a lack of blood leads to permanent patient damage or even death.
What makes this particular inventory planning and control example so complex?
First, the cost of failure is very high as indicated above. Second, both demand and supply are uncertain. As indicated in the example, local accidents could increase the usage of blood many times over. But also collection is not perfectly predictable. Bad weather, holiday periods and so on, can all affect how much blood can be collected. Third, the blood needs to be stored in very precise conditions and can be wasted if not used before its use-by-date. Fourth, there are many different ‘products’ under the general classification of ‘blood’. The different blood types plus the different blood derivatives will all have to be managed separately.
How might the efficiency with which a National Blood Service controls its inventory affect its ability to collect blood?
An inefficient blood service would not only be costly but also would be wasteful of blood. Both these could affect its ability to collect blood. If it is spending money needlessly on the storage and management of blood, it has less money to advertise for blood donors and collect blood in mobile centres and so on. Perhaps more significantly, if large amounts of blood are being wasted, public donors are unlikely to be as motivated to come along and give blood freely.
Nigel Slack, Stuart Chambers & Robert Johnston, Operations Management, fifth edition, Instructor’s Manual
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Case study teaching notes Trans -European Plastics
TEP makes a range of more than 500 plastic household items using batch injection moulding.
The case highlights increasing problems with inventory shortages and declining service levels, at the same time that total inventory levels were at a high level. The company was even considering investing in a warehouse extension. This case allows students to explore the underlying reasons for this situation, and there is considerable numerical data that can be analyzed.
This case provides an ideal introduction to the topic of inventory management, and is at a level to be of use on both undergraduate and Masters/MBA courses. Although describing a manufacturing situation, there are no technical issues to be understood, and the analysis would be little different in a retailing type of service. It provides sufficient information for the students to prepare spreadsheets for ABC analysis and categorization. This would be a good case for assessed work, but is too long and complex for a traditional examination.
Some notes on the Trans-European Plastics case