Richard Haslett owns three bars in Santa Cruz located on the boardwalk. In September 2016, Richard hired Kelly Warton as the Business Manager to take care of accounting and inventory. Her salary is $40,000, which works out to about $20 per hour.

After her first six months at work Richard is dissatisfied with her performance. Kelly seems to be spending so much time taking care of the inventory that the books are always late. Although Kelly has been using standard ordering policies (set in 2015) she claims that very often she finds herself dealing with rush orders to avoid stock outs. In most cases rush orders means compromising on quality and settling for lesser-known brands. This results in a number of dissatisfied customers, and it also meant that Richard still had to take care of many accounting tasks. He had thought with Kelly taking care of running the bars he would have more time for his family and fishing. Before making a decision on whether to retain Kelly, Richard thought he should get another opinion on the inventory problem.

Cindy Haslett, Richard's niece, has just finished a course in Operations Management. Richard offered to sponsor Cindy's summer vacation in Santa Cruz if she would help to study the ordering policies for the bars. Realizing that the inventory policies should be based on demand, Cindy first studied the demand from January 2016 and forecasted the annual demands for the major items based on 52 weeks per year. One of these is listed on the next page.

Discussions with Kelly revealed that orders were placed for each item when it reached its reorder point (what system is this? P or Q?). She uses the order quantities and reorder points estimated by the previous stock manager. Kelly estimates that orders must be placed three weeks in advance in order to purchase the correct brand. She spends about 30 minutes checking with suppliers and placing an order each time an order is placed. A study of the inventory records indicate that annually about 3 % of the material are discarded due to spillage and broken bottles. Richard Haslett pays 9 % annual interest on the debts for his business.

Product	Weekly Demand		Unit Cost ($)	Current Order Quantity	Current Reorder Point
Scotch	20	3	7.80	80	40

Question 3: Using Scotch as an example, explain to Richard why the policy you provide above is better than what Kelly has been using.

(a): Use cost calculations, to explain to Richard why the policy you suggest above will help reduce the costs.

(b): Explain to Richard how the new policy you propose would reduce the time Kelly spends on managing inventory, while also reducing the inventory costs.