The inventory management is one of the most important operations management activities at Manor Bakeries, Europe’s largest manufacturer of ‘ambient’ packaged cakes and pies. (Ambient means that they can be stored at room temperature). Its brands include Lyons and Mr Kipling. Its fleet of vans routinely restocks the shelves of thousands of small retailers and also distribute to major supermarkets, but the re-ordering process is usually managed by supermarket’s own inventory management systems. Cakes are produced at four factories, on production lines, some of which are operated continuously. Although considerable effort is made to forecast sales accurately, there is always uncertainty. Yet there are limits to how much inventory can be used to compensate for demand fluctuations because supermarkets require products to be on their shelves for most of their shelf-life, allowing only a few days for Manor to transport, store and deliver the products.

Input stocks of raw materials must also be carefully managed at each factory. Bulk ingredient such as flour and sugar are delivered to giant storage silos, but managing the hundreds of other ingredients (butter, nuts, dried fruits, pasteurized egg, etc.) is more complex. Some of these are not expensive but are used in huge volumes, while others are very expensive but usage is small. Some ingredient have a short shelf-life and have to be stored in special conditions. Some are easily available, others are special imported and are on long lead times and fresh annual crops such as fruit can vary in quality and availability. Packaging is frequently changed to reflect new promotions and price changes. Yet running out of stock is serious. It can disrupt production schedules and lead to stock-outs of finished products, affecting both sales and customer relations. Inventory also occurs because of the way products are produced on the production lines. Although some products sell enough to warrant their own production lines, most lines have been designed to make a range of similar products. So products are made in batches, sufficient to last until the next production run.

REQUIRED

1. What are the factors which constitute inventory holding cost, order cost are stock-out cost at Manor Bakeries?