Chapter 12, Problem 3.4CQ

SARAH LUBBERS AND CHRIS RUSCHE, GRAND VALLEY STATE UNIVERSITY

Farmers Restaurant is a full service restaurant offering a variety of breakfast, lunch, and dinner items. Currently, Kristin Davis is the general manager for the Farmers Restaurant located in the Grand Rapids/ Wyoming metro area of Michigan. Since becoming manager, Kristin has faced some difficulties with ordering the right amounts of food items for the restaurant. Because of this, there are some weeks the restaurant has a surplus of menu items that are no longer fresh, and must be discarded. At other times, the restaurant has experienced shortages of some items. The fact that inventory accounts for an average cost of 26 percent of the restaurant's total revenues underscores the importance of managing inventory. Kristin would like to find a way to ensure that she is maintaining the proper amount of inventory. Customer counts at Kristin's restaurant have been declining recently, so one of Kristin's greatest focuses is to keep current customers and attract new customers. She believes that a key aspect of this is having all of the items on the menu in stock.

The restaurant industry is competitive. In the Grand Rapids/ Wyoming metro area alone there are over 1,600 restaurants. Some of Farmers Restaurant's most serious competitors are IHOP. Applebee's, and Big Boy, all of which are located within 20 miles of the Farmers Restaurant. so customers have many alternatives from which to choose.

Online inventory systems are used to assist restaurant managers in determining on-hand inventory and gauging how well the restaurant is controlling food costs. The fiscal week for Farmers Restaurant starts on Thursday and ends on Wednesday of the following week. Each Wednesday, the manager physically counts the inventory on hand and enters the data into the online inventory system. The computer software system then compares the on-hand inventory for that week, the amount of food ordered, and the inventory on hand for the end of the previous week with the sales for the current week. By doing so, it is able to determine a total food cost. The manager compares this cost with the benchmark cost to see how well the restaurant has been managing its inventory. This is one of the most important numbers to managers at the Farmers Restaurant because it accounts for approximately 30 percent of total costs in terms of a store's cost structure.

The computer software system also compares the total cost of food on hand with the total amount of sales for that week and computes a percentage of on-hand inventories. As a guideline, the company has set a standard of having between 29 and 36 percent for its on-hand inventory level. The company feels that this level of inventory is an appropriate average to ensure quality food that is fresh and within expiration. Lastly, it is better to keep the inventory at a minimum level to ensure the accuracy and ease of inventory counts.

The Farmers Restaurant Kristin manages has been running above average in terms of food costs. For this reason, her boss has become concerned with the performance of the ordering system she is using at her restaurant. Kristin has been using her intuition to decide how much product to order despite the fact that the product order sheets provide a moving average usage of each product. Kristin bases her inventory management on her intuition because she does not understand how to utilize the moving average forecasting technique when placing orders. An additional complication with ordering inventory is that each item is packed in multiple quantities, so she cannot order the exact amount that she needs. Her boss requested that she create a more accurate way of ordering food and to report back to him in one month. Kristin is worried that if she cuts inventory levels too low she will run out of products, which may result in a decrease in customer counts.

After Kristin met with her boss, she began to think about what changes she could make. She knows that inventory has been a weak point for her, but she remembers one of her employees talking about inventory management from one of his college courses. Kristin decides to ask the employee if he would be willing to help her try and come up with a better way for her to order products. Kristin tells him how the ordering system works, shows him the ordering form, and relates the given information.

Suppose you have been asked to work with Kristin to improve inventory ordering.

Given the above information and an on-hand inventory of 12, determine the risk of stock out at the end of initial lead time and at the end of the second lead time. The lead time is 2 days and orders are placed once a week.