Small changes can make great savings
Inventory control
Nowadays many companies are interested in how they should handle their inventories. In-ventory is seen as something driving up costs and therefore should be avoided. But, the opinions differ depending on who you ask.
In a company there are different positions who affect the inventory control, Finance Manager, Marketing Manager, Supply Chain Manager and a Production Manager. The different positions have their own opinion of how the inventory should be managed since it will affect their performance. The Finance Manager wants to keep inventory low to keep the holding costs down however the Marketing Manager wants to have large inventories and in this way be able to satisfy the customers. The Supply Chain Manager wants to avoid the capital binding in the inventories and the risk of obsolescence, but at the same time have products available for the customers. Since the production cost often is high, the Production Manager wants to have a high utilization of the machines. This often leads to large production series and large inventories.
Determining profitable batch sizes
The Nordic headquarter at Campbell Soup Nordic is facing this situation. The Nordic headquarter has been commissioned by the management to review their inventories that are believed to be too high. The out-of-home products in the product group Bong Bouillon
Dry were used in the investigation of how Campbell Soup Nordic should handle their inventories. The inves-tigation showed that they should increase the produc-tion series e.g. the batch sizes for the most of the inves-tigated products. The larger batch sizes leads to increased inventory levels and larger holding costs. Therefore the investigation showed the opposite of what the management believed. The reason for this is high setup cost for the machines and high manufactur-ing costs in comparison to the cost of holdmanufactur-ing the additional inventories. Other reasons are that Campbell Soup Nordic owns their warehouse and therefore do not have any variable cost as a company using a 3PL (three part logistic). They also have a negligible risk of obsolescence sine their products have long shelf lives. The figure below show the varying costs (holding cost, setup cost and manufacturing cost) dependent on the batch size in the production.
Graph: The varying costs for a Bong Bouillon Dry product
The graph shows that Campbell Soup Nordic should have large batch sizes when the total varying cost is taken into consideration.
0 10000 20000 30000 40000 165 209 253 297 341 385 V ary ing cos ts (S EK /y e ar )
Batch size in sales units
Product 4900 Holding cost Setup cost Manufacturing cost Summation of the varying costs
Table: Optimal batch sizes for optimal production conditions The sensitivity of batch sizes
The investigation also includes a sensitivity analysis where different scenarios were investigated. The scenarios investigated were:
Unexpected sales during campaigns
Decreasing one machine operator at production line 102
Decreasing machine costs for the mixing and production line machines
Increasing the safety time
Decreasing the safety time
Increasing setup times and taking the mechanics into consideration
The sensitivity analysis was performed for four products. The sensitivity analysis shows that batch sizes are the most sensitive for unexpected increase of sales during cam-paigns, increase of the cost of capital and different safety times policies for the inventory of finished products.
The sensitivity analysis is a good tool for the company to understand the charac-teristics of their products and have an under-standing of which action they should take if a scenario would occur. For instance if they would like to have one week of safety time instead of two weeks they would not be able to fulfill their gold standard of 99% in Case Fill Rate for two of the four investigated products.
Recommended batch sizes
The table below shows the current batch sizes for the investigated products and the recommended batch size. It also shows the possible savings Campbell Soup Nordic can do with adjusting the batch sizes. By in-vestigating the rest of the products at Camp-bell Soup Nordic, costs can be reduced and as an old saying tells: small streams make great rivers.
Authors: Linda Rundqwist Karolina Skog Supervisors: Peter Berling Fredrik Ödegard Faculty of Engineering Lund University Henrik Rosdahl Campbell Soup
