Question

Rice Inc. is a multinational company supplying starch worldwide. In order to cope with the increasing demand, Rice Inc. needs to purchase Rice from many countries to be processed it in its milling plants. Weekly demand for starch over the last 10 years (2009-2018) is given: AVERAGE DEMAND OVER THE LAST 10 years is 1052.12

The cost to prepare a purchase order of rice is RO 200. Each ton of rice costs the company RO 80 and the annual inventory holding cost rate is 10%. Generally, the delivery of an order requires 4 weeks.

Rice Inc. is open 7 days per week over 48 weeks yearly.

Q) A recent natural disaster caused the warehouse facilities to be heavily damaged, reducing its storage capacity to an average stock of 250 tons. How should the company’s inventory policy be reviewed to cope with these new facts? What would be the impact of the revised policy on the costs? Explain.

Answer 1

As warehouse facilities has been heavily damaged company needs to revise its inventory policies to fit into current situation for that it has 2 options,

FIRST ONE
calculate safe stock point and incase this point is with in available stock of company no need to worry,
If not it should make arrangements for neccessary stock, in case it is going through tough financial conditions that time it should go for second option .

SECOND ONE
calculate reorder point if it fits within available stock it will be good. If not it has to buy stock on credit so that it won't affect it's customers demand.

WHY it's important to maintain stock?
Because after this much of damages sometimes it becomes highly difficult to fetch products from suppliers, sometimes they deny to give products with fear of loosing their payments.
It's better to go with safety stock as it makes sure that we don't run completely out of stock.( other questions of this case study will help you to calculate both safety and reorder points)