Page 11 - OCS Workbook - Day 2 Suggested Solutions (May 2018)

SUGGESTED SOLUTIONS

EXERCISE TWO (INVENTORY MANAGEMENT AND SYSTEMS MAINTENANCE)
Email
To: Gwen Giovanni
From: You
Date: Today
Subject: RE: Inventory management and systems maintenance
The importance of inventory management
The control of inventory is important for a number of reasons:
• Holding costs of inventory may be high

• Production may be delayed if the company runs out of raw materials

• Loss of customer goodwill if demand cannot be fulfilled
• Obsolescence if inventory with a short shelf life is not used or sold (particularly relevant for
some of our on-trend items)
Inventory management systems
For these reasons, it is important for the company to choose an appropriate inventory
management system. There are three main types of system available.

Continuous inventory system
This system, also known as the perpetual inventory system, keeps the level of inventory under
continual review. Mansako does in fact already record each new purchase or sale as it occurs.
A pre-determined quantity of inventory, such as leather hides, is ordered when the inventory
level falls to a re-order level.
The economic order quantity (EOQ) model can be used to establish the optimum re-order
quantity. This model will minimise the total costs associated with inventory.
Periodic inventory (or bin) system

This system does not keep inventory levels under continual review. Instead, inventory is checked
on a regular basis and a variable order is placed depending on the usage during the period.
For example, stocks of zips could be checked every week to see if any needs to be ordered.
ABC system

This system is based on Pareto’s law. This law states that 80% of annual inventory expenditure
can be accounted for by 20% of inventory items. By dividing a company’s inventory into different
classifications – A, B or C, managers can focus on items that are most important and therefore
need close monitoring.
Category A – items of high value. Close monitoring of these items is vital as is the management of
the supplier-buyer relationship. At Mansako, these would be items such as leather hides.
Category B – items of medium value. Less important than category A and therefore require less
control. At Mansako, these would be items such as handbag lining, buckles, straps and zips.
Category C – low value inventory requiring little management control. At Mansako, these would
be items such as the materials used to stitch individual pieces of the handbags together or the
glue used to attach the lining of the handbag onto the leather.

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