FMCG firm having a sales turnover of Rs 120 crores per tear is carrying 18 days finished goods inventory at any point of time. The firm is spending 3.5 per cent of its turnover on logistics operations. The breakup of logistics cost is: transportation 60 per cent, warehousing 20 per cent and administration 20 per cent.

In order to reduce the inventory cost and enhance customer service, the logistics manager proposed to operate on 6 days inventory level by adopting latest DRP (Distribution Requirement Planning) software module from a leading e-business Solution company. He also suggested the changes in the organization structure to suit the module. On the distribution side for extending superior customer service, he proposed to service their customer through frequent deliveries with smaller lots. This will help in reducing inventory burden on their clients and extend superior service to them. As a result, the transportation cost will go up by 30 per cent, warehousing cost will reduce by 25 per cent and administrative cost will increase by 10 per cent.

Assumptions

1. Operations for 300 days a year.

2. Inventory carrying costs 22 per cent.

Question:

Work out the viability of the project.