ATHLETIC KNIT

A case study on inventory control

By
Aditya Subramani Murugan (1387981)
Naveen Jakka Reddy (1444409)
Vignesh Subbukrishna (1440604)
1) Why is Daniel so concerned about his inventory position? Why does he need to have inventory at all?
Explain in at most 5 sentences.

The possibility of stock-outs is what concerns Daniel regarding the inventory position. The advantage of
Athletic Knit (AK) over low cost importers is its low lead times. But during stock-outs, AKs lead-times
were almost equal to the low cost importers. This would lead to a potential loss of business for AK as the
retailers would prefer low cost importers. Having inventory or specifically, excess inventory, helps AK
achieve quick deliveries and prevent stock-outs.

2) What is stopping Daniel from building everything as it is ordered by the customer?

Building to customer order has a long lead time than supplying from stock. They will not be able to meet
the demand during peak season with their current production rate, if they build to customer order. Also, it
will force AK to do a lot of setups and each setup takes 3 hours to complete. So, it will be very time
consuming and costly.
3) To perform a capacity analysis for AK by filling in the following table using the data provided in the
case.

Season Weeks % sales Demand Capacity CU% Capacity CU% with

with OT OT
July 15-Aug 14 4 10 8517 8598 99.05% 10748 79.24%
Aug 15- Nov 1 11 44 37474 23646 158.48% 29557 126.78%
Nov 15- Dec 14 4 10 8517 8598 99.05% 10748 79.24%
Dec 15- July 14 33 36 30660 70937 43.22% 88672 34.58%
Total 52 100 85168 111780 76.19% 139725.00 60.95%

Table 1
CT = Capacity Utilization OT = Over Time
4) What are your observations from the table that you constructed in part 4)? Is there slack production
capacity? When?
From the table, it is clearly seen that the period from Aug 15 – Nov 1 has no slack production capacity. The
rest of the periods July 15-Aug 14, Nov 15-Dec 14 and Dec 15-July 14 have the slack production capacity
which is given in the table below.

Season Slack Production without Slack Production with

OT OT
July 15 – Aug 14 82 223
Aug 15 –Nov 1 0 0
Nov 15 – Dec 14 82 2231
Dec 15 - July 14 40277 58011
Table 2

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5) How much inventory does AK have in a year?

In each period, Inventory is defined as production minus demand1. The production rate throughout the year
is constant at 460 units per day. We know the annual demand to be 85168 units. So we can calculate
inventory as:

Inventory = Annual Capacity – Annual Demand

= 460*243 – 85168

= 26612

The inventory that AK has in a year is 26612 units.

6) What are the reasons for AK’s high inventory levels?

To reduce order costs:
By ordering in large numbers, your business will reduce the cost it incurs.
To achieve efficient production runs:
When AK is setting up its production line frequently, it will increase its setup cost.
To avoid lost sales:
When a product is out of stock, the customer may move to a different supplier.
Many product varieties:
The huge number of product varieties is forcing AK to produce in large numbers to reduce setup cost and
avoid lost sales.

7) Based on the data provided in Exhibit 4, perform an ABC analysis. Clearly explain your approach.

The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing
its ratings on the following rules:
• A-items are goods which annual consumption value is the highest. The top 80% of the annual
consumption value of the company typically accounts for only 20% of total inventory items.
• B-items are the interclass items, with a medium consumption value. Those 15% of annual consumption
value typically accounts for 30% of total inventory items
• C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual
consumption value typically accounts for 50% of total inventory items2.

Exhibit 4 provides us with the annual demand of each product but it does not provide us with any data for
unit price of each product. So we cannot calculate the annual dollar value of the products. But using the
demand data, we classify the top 20% of the most demanded items as Class A items, the next 30% of the
items as Class B and the last 50% as Class C.

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No Style Code Demand Annual Percentage Class
1 270 7275 9% A
2 620 6912 8% A
3 720 5535 6% A
4 830 4587 5% A
5 750 4262 5% A
6 230 3415 4% A
7 340 3352 4% A
8 500 3258 4% A
9 490 2957 3% B
10 330 2798 3% B
11 440 2648 3% B
12 310 2324 3% B
13 770 2315 3% B
14 220 2286 3% B
15 410 2211 3% B
16 320 2027 2% B
17 290 1832 2% B
18 300 1595 2% B
19 880 1533 2% B
20 450 1525 2% B
21 400 1524 2% C
22 580 1490 2% C
23 870 1477 2% C
24 250 1474 2% C
25 810 1472 2% C
26 200 1438 2% C
27 600 1337 2% C
28 520 1200 1% C
29 210 1152 1% C
30 380 1115 1% C
31 740 1111 1% C
32 630 1002 1% C
33 350 748 1% C
34 550 743 1% C
35 820 738 1% C
36 660 728 1% C
37 680 462 1% C
38 540 456 1% C
39 460 439 1% C
40 240 415 0% C
Table 3
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8) If AK must build inventory, how do they determine the ideal production batch (lot) size? Would the
answer differ for peak and off-season?
Suppose that you will use the EOQ model to answer these questions by following the steps below:
a) Compute the cost per jersey, set up cost and the holding cost.
b) Based on your ABC analysis, compute the EOQ for each class considering the annual demands.
c) Based on your ABC analysis, compute the EOQ for each class for peak season and off-season,
separately.
d) What do you observe from your results for parts b) and c)?

Ideal production batch size:

EPL = SQRT(2*55.5*85168/0.8458*(1-(85168/111780)))
= 6843
Peak season:
In this case, the ideal production batch size cannot be determined since the demand rate is greater than the
production rate.
Off season:
EPL = SQRT(2*55.5*47693.6/0.8458*(1-(47693.6/88136)))
= 3884.33
Ideal production lot size =3885
a) Cost per jersey
Total Material produced = Production unit * Maximum working days
= 460*243
= 111,780 units
Material Quantity = Total Material produced * (1.5/2.5)
= 67068 kg
Cost per kg = $9.50
Total Material Cost = Material Quantity * Cost per kg
= 67068*9.50
= $637,146
Labor cost per hour = $18.5
Total labor cost = Labor cost per hour*set up time*working days*working hours
= 18.5 * 3 * 243 * 8

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 = $107,892
Dyeing Cost = Dyeing cost per kg * total material
= 3 * 67068
= $201,204
Total Cost = Material Cost + Labor cost + Dyeing cost
= $637,146 + $107,892 + $201,204
= $946,242
Unit Cost (c) = Total Cost/Total units produced
= $946242/111780
= $8.47
Holding Cost (h) = 10% of Unit Cost
= $0.85
Set up Cost (A) = Labor cost per hour * Labor hour for setting
= $18.5 * 3
= $55.5
b) EOQ
Class A:
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*4824.5/ 0.8458)
= 795.7
= 796
Class B:
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*2170.9/ 0.8458)
= 533.76
= 534
Class C:
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*1026.05/ 0.8458)
= 366.95
= 367

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c) Peak season
Class A:
Demand Class A during peak=85168*0.44*0.45=16863.264
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*16863.264/ 0.8458)
= 1483.96
Class B:
Demand of Class B during peak=85168*0.44*0.31=11616.91
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*11616.91/ 0.8458)
= 1231.678
Class C:
Demand of Class C during peak=85168*0.44*0.24=8993.74
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*8993.74/ 0.8458)
= 1083.73
c) Off Peak season
Class A:
Demand Class A during off peak=85168*0.56*0.45=21462.336
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*21462.336/ 0.8458)
= 1674.135
Class B:
Demand of Class B during peak=85168*0.56*0.31=14785.164
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*14785.164/ 0.8458)
= 1389.52
Class C:
Demand of Class C during peak=85168*0.56*0.24=11446.519
EOQ = SQRT (2*A*D/h)
= SQRT (2*55.5*11446.519/ 0.8458)
= 1222.60
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9) How do AK’s inventory levels change if the results of the EOQ model are implemented?
The average inventory by the EPL model is 6843/2 = 3422 units
The average inventory if the EOQ model is implemented is Q/2.
From solutions we know that optimum order quantity for Class A, Class B and Class C products.
Average Inventory for Class A = Q/2
= 796/2
= 398 units
Average Inventory for Class B = Q/2
= 534/2
= 267 units
Average Inventory for Class C = Q/2
= 367/2
= 183.5 units
Total Average Inventory will be 848.5 units. After moving from the EPL model to the EOQ model, AK’s
average inventory will be reduced from 3422 units to 848.5 units.

10) What is the alternative to building inventory and how much this option cost AK?
First, we want to see if increasing the production rate will decrease costs of inventory. We perform the
following calculations to access it:
If 9 machines are operating, then P = 111780

By EPL Model, Q = SQRT (2*A*D/h (1-(d/p)))

= SQRT (2*55.5*85168/ 0.8458(1-(85168/111780)))
= 6843.102

Total Cost = (AD/Q) + (hQ (1-(d/p))/2) + CD

= (55.5*85168/6843.102) + (.848*6843.102(1-85168/111780))/2) +
(8.47*85168)
= 690.74 + 690.768 + 721372.96
Total cost = $722754.468
If 11 machines are operating, then P = 136620
By EPL Model, Q = SQRT (2*A*D/h (1-(d/p)))
= SQRT (2*55.5*85168/ 0.8458(1-(85168/136620)))
= 5447.80

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Total Cost = (AD/Q) + (hQ (1-(d/p))/2) + CD
= (55.5*85168/5447.80) + (.848*5447.80(1-85168/136620))/2) +
(8.47*85168)
= 867.657 + 869.91 + 721372.96
Total cost = $723110.52
Difference in Total cost= Total cost while using 11 machines – Total Cost while using 9 machines
= 723110.52 – 722754.468
= $356.052
When we increase the production rate, the total cost increases. This happens because in EPL model, as P
increases, Q decreases. This may cause a decrease in holding costs but the setup costs increase. So in the
case of AK, increasing production rate will not reduce costs.

As an alternative to building inventory, the following options may be explored:

1. Reduce lead times

Lead times can be broken into three parts: Order processing period, manufacturing period and
transportation time. By using the latest in order management systems, order processing can be sped up.
Lean manufacturing systems like Kanban and Value stream mapping can be used to reduce
manufacturing times. Reducing lead times will decrease the need to maintain high inventory levels.
2. Revise production cycles/quantities
Increasing the production cycles and reducing production quantities will allow AK to decrease its
inventory levels. But the total cost incurred by AK will increase as the setup costs increase. So AK may
explore this option if the setup costs decrease in the future. They may perform activities like Single
Minute Exchange of Dies (SMED) to reduce their setup times and hence setup costs.
3. Improve the demand forecasting
As mentioned in the case, forecasting can be very tough in the case of AK. But with the recent
improvements in computing capabilities, predictive analysis can help AK in better demand forecasting.

Citations:
1. ^Operations and Production systems with multiple objectives, Behnam Malakooti, pg 316
2. ^ https://www.lokad.com/abc-analysis-(inventory)-definition