Inventory management — practice question

Kelp Kings (KK). Kelp (or seaweed) farming means growing and collecting seaweed. Farmers take the kelp from natural beds in the sea. This type of farming has a low environmental impact. KK holds a licence to harvest and exploit a section of seabed in country W. After harvesting, the kelp is dried and packaged at KK’s premises before being sold to food manufacturers. KK is a labour intensive social enterprise with a mission to ‘benefit the planet by the most efficient use of natural resources’. In 2020 KK chose to build a kelp refinery. The estimated cost was $5 million and KK would have to borrow most of this amount. The refinery would use kelp as a raw material to produce a pulp that can be used in the manufacture of biodegradable plastics. Timeline of KK: 2021 - The Operations Director introduces Just in Time (JIT) inventory management to cut costs and reduce wastage; worker representatives meet management to discuss poor employee motivation; construction of the outer walls of the new kelp refinery is finished after only 15 months. 2022 - Training for employees for the new kelp refinery starts six months late because of a skills shortage in country W; KK’s Managing Director is interviewed by a local newspaper; KK’s sales of kelp rise by 200%; average lead time for customer orders lengthens from one week to one month. 2023 - The new kelp refinery opens; 50% of KK’s kelp production is now processed in the refinery; the refinery is running at 40% capacity. 2024 - KK begins to import kelp from lower-income countries to be processed in the refinery. Future business strategies: In 2025 a new government was elected in country W with policies designed to improve the economy. KK’s directors are thinking about the probable effect of the government’s policies on KK’s business strategies. Appendix 1 gives a network diagram of the kelp refinery project in 2020 using simultaneous engineering with purchasing, construction and human resource teams. Appendix 2 compares operations before and after JIT was introduced in 2021. Before JIT: kelp harvested each week; harvested kelp put into a large drying facility for five days; dried kelp packed in bags ready to be stored; bags stored in a secure warehouse. After JIT: kelp harvested each day; harvested kelp sent straight to manufacturers with no processing or packaging; costs are much lower because the kelp is unprocessed. Appendix 3 includes an interview with the Managing Director in 2022 saying the refinery is state-of-the-art, employees put forward ideas through an employee suggestion scheme, and the refinery aims for zero waste through recycling and renewable energy. Appendix 4 lists the new government’s policies in 2025: using monetary policy to stabilise inflation; government grants to support carbon-efficient businesses; minimum wage to be increased by 40% by 2028; reform of country W’s education system including government-funded university tuition; removal of trade barriers for businesses in the primary sector.