Introduction

Fletcher Company was founded some 50 years ago and just celebrated its “Golden Anniversary”. The company has very strong customer orientation and very operations oriented. However, the working capital requirement to sales ratio is quite high at 0.115 last year compared to a industry average of 0.05. Thus, there may be some potential problem about working capital.

According to the analysis of the newly hired CEO John Cummings, the company has abnormal high inventory level which is much over the required sales level. Therefore, inventory management could be the first step to look into the working capital problem of the company.

Inventory Management Analysis

Currently, the company adopts an ordering system of ordering five times a year, 750 crafts each order. The holding cost per unit is $333 and ordering cost per order is $320 (Table 1).

Furthermore, taking the cost of capital, which is 15% for the company, the annual cost of current ordering system would be $28,457,437(Table 1), which is the net present value of the cash outflow for the 5 orders in the year as well as the holding costs and ordering costs.

However, if the company adopts the just-in-time inventory management system, the company could order 110 every one and a half week, which means 35 orders per year and the last order would only order 10 crafts to match the required order amount per year. In addition, the ordering cost would be increased by $50 per order as the company has to do the forecasting for the inventory and sales based on a just-in-time inventory system. Overall, the annual cost of just-in-time ordering system would be $28,159,889(Table 3), which is $297,548 lower than the current level. Thus, this implies that the just-in-time inventory management could be a better choice for the company based on the inventory cost analysis.

Working Capital Requirement