Fletcher Company Case Study

Executive Summary

Fletcher Company recently is studying the operation area. And the new hired CFO is considering replacing the current inventory system with a type of just-in-time inventory system.

After analysis, the company found that if it implements "just-in-time" inventory system, the present value of the total cost would be reduced, WCR/S ratio would decrease, and the company can have more cash free from the inventory balance to do all the other things a company needs done. Thus implementing "just-in-time" inventory system might be a better choice.

But "just-in-time" inventory system also has some risks. The biggest risk is that if the company can not make an accurate forecast of the units required well in advance, the supplier will not have enough time to plan production, than the company may suffer from inventory shortage. Besides, transportation planning also is an issue.

Calculation

1. Calculation of order cost per order

Since Annual Order Cost = 1600

Number of orders = 5

Thus Average Order Cost = 1600/5= 320

2. Calculation of operational holding cost per crate

Since Total Holding Cost= Warehouse Rental Fee + Annual Insurance Bill

= 120000 + 5000= 125000

Average Inventory= Order quantity/2 = 750/2= 375

Thus Operational Holding Cost Per Crate = 125000/375= 333.33

3. Calculation of the annual cost of current inventory management system

t Payment Day Present value factor Cash flow Present value holding and ordering costs Present value of purchase cost

0 45 0.9819 (750*8000=)6000000 5891305

1 118 0.9539 6000000 5723116

2 191 0.9274 6000000 5564263

3 264 0.9023 6000000 5413990

4 337 0.8786 6000000 5271620

410 0.8561 (125000+1600=)126600 108381

PV of Total Cost 27972675

Since annual opportunity cost = 15%, payable credit period=45, order quantity=750, cost per unit=8000, total holding=125000, ordering cost=320*5=1600

4. Calculation of the annual cost of the proposed system

t Payment Day Present value factor Cash flow Present value holding and ordering costs Present value of purchase cost

0 45 0.9819 (110*8000=)880000 864058

1 55 0.9779 880000 860594

2 65 0.9740 880000 857157

3 76 0.9698 880000 853408

4 87 0.9656 880000 849692

5 97 0.9618 880000 846341

6 107 0.9580 880000 843017

7 118 0.9539 880000 839390

8 129 0.9498 880000 835795

9 139 0.9461 880000 832553

10 149 0.9424 880000 829336

11 160 0.9384 880000 825826

12 171 0.9345 880000 822345

13 181 0.9309 880000 819207

14 191 0.9274 880000 816092

15 202 0.9235 880000 812693

16 213 0.9197 880000 809322

17 223 0.9162 880000 806282

18 233 0.9128 880000 803264

19 244 0.9091 880000 799971

20 255 0.9053 880000 796705

21 265 0.9020 880000 793758