1. The company faces issues with optimizing gunny bag inventory orders to avoid stockouts while minimizing carrying costs. Gunny bags are sourced from Kolkata and take 12 days on average to arrive at the company's cement plant. 2. Applying the economic order quantity model, the optimal order size is 85,500 bags placed every 3 days. This minimizes total inventory costs while maintaining a buffer stock to prevent stockouts due to transportation time variations. 3. Maintaining a buffer stock of 100,000 gunny bags allows the company to place orders of 85,500 bags every 3 days. This reduces total inventory costs compared to orders every 12 or 2 days.

1. Name – Ashish Jindal
Roll No. – 063011
Gunny Bags Inventory at Western India Cement Company
WICC (Western India Cement Company) operates one million tonne capacity cement plant at
Cement Nagar in western India. Although the gunny bags required for cement packing is
easily available but the cost of maintaining gunny bags inventory is of high concern to
management.
It has a policy to use gunny bag for transportation of cement. The gunny bags which are made
from jute are sourced from Kolkata and almost all the requirement is sourced from there.
The total requirement of gunny bags in a year is around 20.4 million bags including the
burstage and other losses of around 2%. Orders are placed on monthly basis by the purchase
division on suppliers. (The average cost of one bag is Rs10/unit.)
The bags are dispatched in goods train from Kolkata and in Delhi it takes 5 hours to unload
the bags and load it to trucks from where they are taken to works site. On the basis of previou
records it has been observed that it usually takes on an average 12 days to reach at factory
and minimum 10 days & maximum of 15 days to reach at factory.
The company cannot afford to be out of stock of guny bags because it will adversely affect
the despatch of cement just for a Rs 10/- bag. Now the issue before the company is to
optimize their orders so that they don’t run out of stocks and also they don’t maintain high
inventory which results in high inventory cost.
The issues which have been identified in the case are as follows:
 Computation of ordering cost
 Transportation of gunny bags
 No out of stock situation
 Carrying cost of inventory of gunny bag
 Frequency of orders to be placed
 Variation in transportation time and quantity demanded
1. Observing the ordering system of the company we can say that company majorly required
three products for its working i.e., coal, diesel and gunny bags. Also looking at industry
figures a significant amount of both coal and diesel is required for manufacturing cement.
The company gives monthly orders for coal, two orders in a month for diesel and lot
many orders for gunny bags in a month. The purchase division has apportioned the full

2. ordering cost on the basis of number of orders that are placed. In this way, it is observed
that almost full ordering cost is being charged to ordering of gunny bags. However this
can not be correct at all because the amount of coal and diesel required is much more than
that of gunny bags. Since all the commodities are required in the process and none can be
left out so what we should do is to restructure the ordering cost computation method in
order to avoid this mistake. We shall charge the ordering cost according to the quantity
being used of three items. This will show the clear picture of ordering cost which is
charged on gunny bags.
Also assuming that all costs of the purchase department is fixed cost. By this method we
would even be in a better position to distribute ordering cost among all three
commodities.
2. Second issue is that gunny bags are dispatched by train from Kolkata to Delhi then from
Delhi to plant through trucks. To minimize the time and cost involved in transportation
following alternatives can be looked upon:
• The company can use the trucks which go to east India for transportation of cement
and come empty. As instead of coming back empty they can be used to carry the
gunny bags as and when required. This will reduce the transportation cost
significantly. But one issue will be the availability of trucks according to the dispatch
schedule of gunny bags. Assuming that enough trucks would be available that
company would be despatching there so as to facilitate procurement of gunny bags.
(For this company has to match the despatch sechdule with the procurement schedule.
Assuming that despatch to eastern India is made in every 3 days therefore order for
gunny bags shall also be placed in every 3 days)
(Refer Exhibit 1)
• Another way out can be transporting the gunny bags through train directly to the plant
in western India.
Comparing above two ways the first solution is more feasible because the cost incurred will
be reduced significantly as trucks have to come back empty and now they can carry gunny
bags.
The reason that company is using such a complex method of transportation could be:
 The manager in charge have some personal gain by using this procedure or
 There might be high bureaucracy in the purchase department and they are not
working optimally.

3. 3. The company cannot afford to be out of stock of gunny bags. Since all the cement is
despatched in gunny bags, therefore any shortage of gunny bag will result in hindrance in
despatch. Also the cement is on an average priced around Rs. 350 ber bag and the cost of
on gunny bag is Rs. 10. This also makes clear that if company is running short of gunny
bags then it will loose huge amount of sales only for due to shortage of a very small value
item.
Therefore the company shall look forward to maintain some amount of buffer stock that it
will hold throughout the year in order to avoid this situation.
4. Another issue is to reduce the carying cost of gunny bags while avoiding any out of stock
situation for same. This can be also be done by maintaing the buffer stock. The carrying
will be then computed as follows:
• Carrying cost on amount of buffer stock
• Carrying cost on amount of gunny bags ordered
For this purpose the company shall adopt EOQ (Economic Order Quantity) model of
inventory.
But EOQ model has following assumptions:
• Annual requirement should be known in advance.
• Ordering cost and carrying cost as a percentage of inventory is known and is
fixed.
• The inventory is used on an even basis throughout the year.
• There is no fluctuation in lead time.
These assumptions can be taken care of if company maintains some amount of buffer
stock say 100,000 gunny bags.
(Also for this purpose let us assume that ordering cost is Rs.740)
Taking carrying cost as Rs. 2.10 (21% 0f Rs.10), the economic order quantity comes to be
85,500 units and for this, company shall place orders in every 3 days.
(See exhibit 2, 3 and 4 for comparison)
5. Another issue is to decide on the frequency of orders to be placed i.e. the time interval in
which order shall be placed so that the carrying cost can be reduced and also no out of

4. stock situation is being faced by the company.
This can also be computed by EOQ model that can be applied for gunny bags. Since the
EOQ comes out to be 85,500 units, therefore by dividing total annual requirement by this
figure we can obtain the total number of orders to be placed for gunny bags throught the
year. Following this approach, it comes out to be 120 orders per year. The company shall
place orders for 85,500 units in every 3 days interval. This will ensure minimum total
inventory cost (Carrying cost + Ordering cost) and also by maintaining buffer stock
company can avoid the situation of out of stock.
Exibits 2, 3 and 4 shows the comparison of total inventory management cost under three
different cases i.e.
• When orders are placed in every 12 days interval.
• When orders are placed in every 3 days interval.
• When orders are placed in every 2 days interval.
6. Another problem arises due to variation in transportation time of gunny bags i.e. it is not
fixed and it could take anywhere from 10 days to 15 days due to which company shall
maintain a buffer stock. Further the monthly requirement is also not fixed which means
that it will not be feasible to apply EOQ model unless buffer stock is maintained.
Since gunny bags are a low cost item but it’s an essential item for dispatching of cement
which is costly item so we have to take in consideration all the situations so that we are not
short of gunny bags and at the same time we also don’t stock too much which will result in
substantial increase in cost of carrying inventory.
Fixed quantity is selected so that there are no hassles to count inventory on daily basis and an
amount would be fixed which would be ordered on routine basis.
However the case seems to be ambiguous because details of ordering cost is not given, and
also amount of coal and diesel required is not mentioned. Therefore a proper and complete
solution of the case could not be arrived at.
Exhibits:
1.
Order Qty.
Opening Monthly Avg. Daily (Placed evry 3rd
Month Stock Req. Req. day)
Jan 5,84,564.00 641926.8 20,707.32 63000*
Feb 806310 27,803.79 83400

5. Mar 961329.6 31,010.63 93000
Apr 898905.6 29,963.52 90000
May 898905.6 28,996.95 87000
Jun 811512 27,050.40 81000
Jul 913471.2 29,466.81 88500
Aug 977976 31,547.61 95000
Sep 944683.2 31,489.44 95000
Oct 913471.2 29,466.81 88500
Nov 932198.4 31,073.28 93000
Dec 998784 32,218.84 96500
1,06,99,473 1,06,55,900
*Note:
• In January firstly the opening stock will be used and only then order shall be placed.
(Keeping buffer stock of 100,000 units)
• Also order is placed in every 3 days therefore order is placed for the requirement of
three days only.
2. When orders are placed on 12 days interval.
Inventory Carrying Cost
Units Cost (Rs.)
Avg. Order Qty. 3,52,524.00 3,70,150.20
Buffer stock 1,00,000.00 2,10,000.00
5,80,150.20
Ordering Cost
No. of Orders 29
Cost per Order 740
21460
Total Cost 6,01,610.20
3. When orders are placed on 3 days interval.
Inventory Carrying Cost

6. Units Cost (Rs.)
Order Qty 85,500.00 89,775.00
Buffer stock 1,00,000.00 2,10,000.00
2,99,775.00
Ordering Cost
No. of Orders 119
Cost per Order 740
88060
Total Cost 3,87,835.00
4. When orders are placed on 2 days interval.
Inventory Carrying Cost
Units Cost(Rs.)
Avg Order Qty 57,400.00 60,270.00
Buffer stock 1,00,000.00 2,10,000.00
2,70,270.00
Ordering Cost
No. of Orders 178
Cost per Order 740
131720
Total Cost 4,01,990.00