EuroFood Case Analysis: History: EuroFood was created by French restaurateur, Mr Vigneau which specializes in the importing and distributing of food products from Europe to Hong Kong. EuroFood has faced a problem with inventory costs. The Olivier Company decided to buy EuroFood on the condition that inventory levels has to be reduced from its current level of 11 million Hong Kong Dollars to at least 4 million Hong Kong Dollars (assumption). In order to achieve the inventory reduction a plan of action has to proposed which details the solution to the current high levels of inventory.
All the products brought to Hong Kong are shipped either by plane or through cargo boats (channels of distribution). The exclusively perishable products shipped through airplanes have no inventory records to be kept. The only inventory of Euro Foods is the products shipped via boats. The products shipped through boats are divided mainly into two types: 1. Complete Container: Contains products shipped from the same supplier. Complete container takes about 20 days to ship from Europe to Hong Kong and costs 0. Hong Kong Dollars per kilogram 2. Consolidated container: Contains products shipped from a group of suppliers using the same container as a rented facility. This shipping takes about 30 days to reach the customer and costs about 3 Hong Kong Dollars per kilogram. Main Problem: * The current level of inventory of Euro Foods is worth $11 million. This is too much compared to the Olivier Company which has the same volume of business as Euro Foods with a corresponding inventory level of only $4 million. The order quantity is high due to wrong forecasting which leads to high inventory costs * Some products have higher inventory costs than its annual sales( Eg: The product Carton Peach has an inventory cost of $437,113 and an annual sale of $ 253,248 which led to profits of only $68,377) * Due to higher inventory levels of the products the annual profit from the respective products are significantly lower compared to products which has lower inventory level. There are too many product categories (around 200 different products) which has higher inventory levels and lower annual sales(Eg: The product Crozes Hermitage 1984 has $158 annual sales but the inventory level is $2045 and total profit is only $47) Solutions: * Cut down the products which has low profit and low annual sales but high inventory costs(Eg:Crozes Hermitage 1984 * Concentrate on top sale products like for example UHT Whipping cream 1 Liter, Portion Butter Unsalted etc. hose annual sales are high compared to inventory costs * Make the forecasting of all products more accurate by using better forecasting techniques which can reduce the inventory level and ordering quantity more accurate * Top sale products like Whipping cream and Butter has to ordered more frequently based on the accurate forecast (using combined container) rather than storing it because these products can go bad easily. Combine the products from the same supplier to reduce the ordering quantity(Eg: Products from Supplier “Besnier” can be combined into the same container) * Negotiate with current suppliers to reduce the ordering cost * Seek third party distributors to get a lower shipping cost if negotiation with current suppliers does not work out. Assumption: * The holding costs and inventory costs affect the profit of the products * Time Frame in which the inventory reduction has to be achieved is irrelevant(Assumption)