Ferro Industries: How Much Stock Is the Right Amount?
Ferro Industries distributes industrial components products across Europe. One SKU family accounts for a disproportionate share of complaints.
Demand averages 1607 units a week with a standard deviation of 498 units. Replenishment lead time is 3 weeks and has itself been slipping. Each unit costs €2203 to buy and carries at roughly 23% a year once warehousing, insurance and capital are counted. Gross margin is 30%.
The line currently stocks out about 6% of weeks. Sales say every stockout sends a customer to a competitor. Finance say inventory is already too high.
demand
- weekly mean units
- 1607
- weekly std dev units
- 498
- coefficient of variation
- 0.31
supply
- lead time weeks
- 3
- lead time reliability
- deteriorating
economics
- unit cost
- 2203
- gross margin pct
- 30
- annual holding cost pct
- 23
derived hints
- mean demand over lead time units
- 4821
- demand std dev over lead time units
- 863
current performance
- service level pct
- 94
Advise the operations director. Your answer should provide:
- Analysis — the reorder point and safety stock implied by the demand and lead time, and what each service level costs.
- Risks — where the assumptions break, especially lead time variability.
- Recommendation — a target service level and stock policy, with the cash impact.
State any assumptions you make.
80 points, 60% to pass.
- recommendation20
- market analysis15
- risk assessment20
- financial analysis25
Reveal suggested structure
Reorder point = mean demand over lead time + z x std dev over lead time. Trade the holding cost of safety stock against lost margin on stockouts.