Page 195 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes adequately catered against stockouts. The month-wise receipts and consumption pattern
of Gunny bags for the years 1989, 1990, and 1991 have been presented in Appendix - 1,
Appendix - 2 and Appendix - 3 respectively.
Calcutta is the major source of Gunny bags in the Country. Almost entire quantity of
Gunny bags requirement of WICC is obtained from Calcutta. There is no major bottleneck
in the availability of Gunny bags. However, there is variation in the transportation time
of Gunny bags from Calcutta to the works of WICC. The bags are despatched from Calcutta
by goods train to Delhi. Once the wagons arrive in Delhi, the bags are unloaded within 5
hours and loaded on to trucks for transportation to the works site. Past records of railway
receipts received from Calcutta and the date on which the bags were received at the
factory indicates that on an average 12 days (Appendix - 4) are required from the day the
materials are despatched from Calcutta till it reaches the factory. Normally monthly
orders are placed by the Purchase Division. The despatches from Calcutta are regulated
through despatch advice communicated periodically through telex/fax.
The expected monthly requirement of bags for the year 1992 have been furnished in
Appendix - 6. It is desired to finalise the procurement and inventory policy in respect of
Gunny bags for the year 1992 in order to minimise the total cost related to Gunny bags.

The Purchase Division has indicated an ordering Cost of ` 740/order (Appendix - 5). The
cost of each Gunny bag can be taken to be `10.00 per bag.
Comment on the Compensation of Ordering Cost. Suggest an alternate (better) method if
any. Also indicate how the inventory carrying cost (which has been estimated to be 21%)
needs to be computed.
Suggest a procurement and inventory policy for Gunny Bags for the year 1992, with cost
and consumption and other data provided in the case.
Appendix 1: Statement Showing Month-wise Receipt and
Consumption of Gunny Bags for 1989

Month Opening Stock Receipt Consumption Closing Stock
January 1624628 1770000 803189 2591439
February 2591439 80000 688372 1983067
March 1983067 - 850059 1133008
April 1133008 450000 621129 961879
May 961879 948500 735840 1174539
June 1174539 1437625 653332 1958832
July 1958832 573000 861061 1670771
August 1670771 476125 722555 1424341
September 1424341 287500 829322 882519
October 882519 867752 926057 824214
November 824214 1034209 904917 953506
December 953506 1354250 920334 1387422
Total 9278961 9516167 16945537
- Average monthly closing stock = 16945537/12 = 1412128
- Average monthly receipt = 9278961/12 = 773246
- Average monthly consumption = 9516167/12 = 793014

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