Surprising risk partitioning impact on inventory optimisation : A case study

Abstract

This case study focuses on a gigantic iron ore mining operation with a large geographic footprint and located some distance inland in the outback of Western Australia. The mining company also owns and operates an ore shipping port on the coast. The mine management asked for quotes to build new larger inventory warehouses at the mine and port to house the stock stored out in the open and also to house the returned ‘squirrel’ stock from dispersed workshops. (Stock was illegally ‘squirrelled away’ to safeguard stock availability.) On investigation, it was found that the ‘squirrel’ stock of conveyor belt idlers, valued at a cost of about AUD$10m, contained a high percentage of ruined idlers due to inadequate outside storage at the mine workshops. On further investigation, it was found that the ‘squirrel’ stock was really a symptom of the lack of trust in the central store’s inventory management methodology and product availability. Inventory modelling results showed that improved risk-responsive stock levels could both increase confidence from workshop management, thereby reducing the desire to ‘squirrel away’ stock, and also affect the new warehouse space requirements. Risk-responsive stock levels turned out to be very capital-efficient and reduced many reorder points. Returning ‘squirrel’ stock would now need no increase in warehouse space and the new risk-responsive stock levels would, in fact, lead to a decrease in many stock levels. As a final outcome the risk modelling simulations showed that risk-trimmed stock levels removed the need to build new facilities. Furthermore, through more risk-appropriate stock levels, customer service and parts availability could be significantly improved. As a consequence, the desire to ‘squirrel away’ stock could also be reduced or eliminated.