Problems faced by Grandiose Motors - Essay Example

Problems faced by Grandiose Motors Grandiose Motors is at its growth stage in the business life cycle. The top of the line quality with excellent customer service has enabled the firm to achieve a high growth rate in a very short period of time. Although this is a good thing for the company, as every organization’s aim is to achieve fast growth. The CEO of Grandiose Motors, is aware of the fact that it is very important to properly plan the growth phase of the company as companies which fail to do so, usually end up closing down due to inefficiencies. This is why he has identified a number to factors related to inventory management which could be a hassle when the company grows further and the market share increases. Being proactive in his approach, the CEO wants to make sure that the planning for inventory management is done in advance so that the company can remain efficient. A major factor, which Felix Fabulous has extracted out, which could cause problems to the company is the inventory management system of the spare parts which are used in after sales service, one of the most important reasons why customers prefer Grandiose Motors over its competitors. In order to maintain the reputation of the company as an excellent provider of after sales service, the CEO wants to make sure that the purchasing and inventory management of the service parts should remain as efficient as possible and the company must be able to provide all the necessary spare parts without delaying customer wait time and at the same time reduce the cost of inventory holding and other operations in order to provide customers with low priced after sales service car repairs.. That is why he wants the purchasing department to devise strategies for improved purchasing and warehousing of spare parts and other materials. Problems faced by Grandiose Motors: A car dealership is a business in which profitability depends on per square foot of floor space and as vehicles occupy a lot of space, it is important that any car dealership must allocate maximum space to accommodate the placement of vehicles. In order to do so, it must utilize a much lesser space for other operations such as keeping and warehousing inventory. In light of this, Grandiose Motors faces the following problems related to space availability and inventory management: The company does not of excess space for storage of parts, in order to keep its inventory, it had to compromise on space available for placing the cars it sold. The company did not have enough financial resources to purchase more space in order to accommodate the required inventory while keeping the same level of stock of cars. The inventory management system was based on historical data rather than forecasting techniques to meet future demands. All the parts had different levels of demand and different suppliers; hence the company had to deal with many suppliers at the same time. This prohibited the company to achieve cost cutting as they could not purchase bulk quantity from a single supplier at a discount. With a low rate of inventory turnover (which is a fact in car business) the company had to delay new shipments before the older ones were sold due to lack of warehousing facilities. As a result of low inventory turnover rate, the holding cost for Grandiose Motors was high which prohibited the company to achieve economies of scale. Suggestions for improvement: In order to deal with all the problems the company might face in future; it must switch to implementing Just in Time and Lean production strategies in all of its operations. This would enable the firm to maintain required inventory levels at all times and at the same time successfully fulfill the needs of customers. Moreover, it would also enable the company to cut costs and achieve economies of scale. Grandiose Motors can apply JIT systems in the following operations: 1. Suppliers: Grandiose Motors must look for large suppliers who supply more than just one spare part or material. This would enable the company to make a large order and hence achieve bulk discounts. The company must aim to form JIT partnerships with the suppliers. This would be achieved when both the suppliers and the company have the same goal of reducing waste and driving the costs down. Developing JIT partnerships with the suppliers would enable the company to achieve the following goals: 1. Elimination of unnecessary activities: If Grandiose deals with just one or few large suppliers who have a good reputation in the market, it would not need to inspect the materials on a regular basis and at the same time, the company can be sure that it would receive good quality spare parts and other materials because of good reputation of suppliers. 2. Elimination of in-plant inventory: as the main purpose of JIT is to receive the materials as and when needed, the company can cut its warehousing costs and space by shifting inventory holding responsibility to the suppliers. This would enable the firm to reserve more space for vehicle display and at the same time reduce its inventory holding costs. Moreover, Grandiose Motors will also be able to reduce wastage costs due to obsolete equipment and materials. The following graph shows how Grandiose can cut average inventory costs by adopting JIT systems: 3. Elimination of in-transit inventory: Grandiose Motors can adopt Consignment Inventory system to reduce in-transit inventory. Consignment inventory system means that the supplier would maintain the title to the inventory until it is used. 4. Elimination of poor suppliers: grandiose Motors can reduce the number of suppliers while making long term commitment with only those suppliers who can agree on their terms and provide timely, good quality material to the company. This would help the company to eliminate those suppliers who are providing the material with a quality not upto their standards. 2. Layout: By adopting JIT layout techniques, Grandiose Motors can reserve more space for vehicle display and at the same time reduce the cost of movement as JIT system move materials directly to the location where needed. This would help Grandiose Motors achieve the goal of utilizing less space for inventory handling and more for car display. It would also remove the burden of storing inventory which adds to the cost of inventory. By designing a layout such that the servicing station is near to the area where inventory of parts is located, the organization can reduce the costs of moving the inventory. At the same time, more space can be allocated to the car display section. 3. Inventory: Just in Time inventory is defined as the minimum inventory necessary just to keep a perfect system running. It would help the company to eliminate excess inventory holdup which takes a lot of space and adds to warehousing costs. It is especially useful in the current scenario as Grandiose Motors require maximum space for car display and not for warehousing. JIT would help the company achieve the following goals: 1. Reduce lot sizes: JIT would enable the company to eliminate waste by reducing investment in inventory. Getting inventory as and when required would reduce the batch sizes that would help eliminate costs such as warehousing and the risk of parts becoming obsolete that would be wasted. 2. Reduce setup costs: As the inventory reorder quantity and the maximum inventory level drop, both the inventory and the cost of holding it decrease. 4. Scheduling: JIT would enable the company to design effective schedules communicated both within the organization and to outside suppliers. Effective scheduling would also enable Grandiose Motors to meet customer orders while driving down inventory and reduced work in process. By implementing JIT, the organization can achieve the following benefit: Level schedules: Level schedules process frequent small batches rather than few large ones. It is the operation manager’s task to make and move small lots in order to economize the level schedules. 5. Quality: The overall advantage of using JIT inventory system is to provide high quality service and equipment to customers. As JIT forces down inventory, there are fewer bad units which can be easily identified and replaced as lower inventory easily exposes bad quality. JIT also improves quality in a way that as it shrinks lead time, the errors are easily and quickly identified which can be rectified sooner. Finally, better quality results in fewer buffer stock and therefore, inventory holding up costs can be reduced. Supply chain management for Grandiose Motors: In order to maintain economies of scale at Grandiose Motors and keep operations costs low in the future, the management of the company must devise and implement effective supply chain strategies in the short and long run. Currently, Grandiose Motors has outsourced the production of materials and spare parts to suppliers who provide them with the required materials. Outsourcing has certain advantages to the company such as: The company can concentrate on its primary business of selling cars. The company can save investing money in building plants to manufacture materials and spare parts and rather invest that money in the core business operations. The company can reduce inventory costs as it can purchase the equipment based on seasonality and demand. If the management of the company does not have expertise in managing the production of spare parts, it is much feasible to outsource the work However, on the other side, the company can be at a disadvantage as it will have to rely solely on the suppliers to provide them with the materials and that could result in the following risks: The supplier may fail to provide the parts on time which could delay the customer and result in bad publicity for the company. The goods provided by the supplier may not meet the quality standards which the company requires. The supplier may close down his business in between and the company might be left with no choice but to purchase equipment from someone else on urgent basis, which might be costlier. If the number of suppliers for a specific part is less or the part is not easily available in the market, the supplier may have monopoly and may ask for a higher price which would add to the costs of the company. The supplier may not reach an agreement which would be favorable to the company. Grandiose Motors currently has many suppliers who provide materials and spare parts to the company. When there are many suppliers, usually the procedure of selecting the suppliers is through “request for quotation” and the lowest bidder is selected to whom the order is given. In this way, the company is able to get the order at the lowest possible cost. The bad side of this procedure is that the lowest bidder does not guarantee best quality material which would result in less customer satisfaction for the company. The alternative for Grandiose Motors is to shift on few large suppliers who provide a large range of products with whom the company can get into a long term agreement. This helps the company as few, reliable suppliers would better understand the company’s broad objectives as well as the requirements of the customers. Having few suppliers can also add to the value as suppliers would achieve economies of scale and a learning curve that would yield both lower transaction costs and lower production costs. They may also be willing to participate in the JIT systems with the company. The overall advantage of having few large suppliers is that both the company and the suppliers would collaborate and become more efficient and reducing prices over time. Having few suppliers result in the following advantages for the company: Mutual agreement on goals: the company and the suppliers can form a mutual goal of satisfying the customer as he is the only entity who puts money in the company and the success of the business depends on his satisfaction. If both, Grandiose Motors and its suppliers, form the same goal, then automatically the quality of suppliers would increase and along with that, the success of company would increase. Trust: With time, trust will develop between the company and its suppliers which would help both the company and the supplier to share information that is vital for success. Along with that, a successful, trustworthy relation would help both the entities to share risk and cost savings that would be beneficial to both suppliers and the company. Compatible organizational cultures: Working together with the same suppliers over a long term can be beneficial to Grandiose Motors in a way that the suppliers as well as the company would be familiar with each other’s cultures and when the champion within one of the two firms would promote informal and formal communication, this might contribute to the alignment of the organizational cultures with would further strengthen the relationship between the company and its suppliers. In the long run, Grandiose Motors must aim to integrate vertically as it grows. Vertical integration is the development of the firm’s ability to produce goods or services which it previously purchased from suppliers or distributors. When the company gains further experience in the spare parts and manufacturing of other parts, and it has generated the necessary resources to finance the investment, it must invest into purchasing its suppliers or open up its own manufacturing plants to manufacture the materials and the spare parts. This can result in numerous advantages for the company. Most importantly, it may provide substantial opportunities for cost reduction, quality maintenance and on-time delivery. Moreover, the reliance on suppliers would be eliminated and the company can reduce costs as the profit margin of suppliers is removed as the company manufactures the parts itself. Through backward integration, the company can own the suppliers of parts and materials and further integrate into manufacturing and procurement of even the raw materials required for producing raw materials. Vertical integration would be most beneficial when the company gains a large market share and develops the management talent to operate on the acquired vendor successfully. Conclusion: Felix Fabulous, the CEO of Grandiose Motors , being proactive in his approach, has correctly identified the areas where the company might get into trouble as it grows with time. It is a good approach to be proactive as Grandiose Motors has shown a considerable growth rate and to remain at the same pace, it is important for the company to plan ahead. The problems which the company might face in future, related to inventory and supply chain are well indentified and hence the report submitted is a combination of alternatives the company can adopt to cope up with the dilemmas it might face. The company can successfully adopt and implement Just in Time system in its operations and can avail the many advantages of this system. By successfully implementing JIT system, the company can reduce its inventory and at the same time, build up long lasting relations with the suppliers which in turn would result in space availability which would be beneficial for the company as it would be able to keep more cars on display, and long lasting relations with the suppliers would result in efficient delivery of inventory as and when required and at the same time it would also help to improve the quality of the spare parts and materials which would result in more customer satisfaction and hence higher number of loyal customer base. With the intention of growing larger and larger with time, Grandiose Motors can further reduce its costs and gain economies of scale through backward integration through which it would acquire its suppliers. The company must plan its future growth and operations so that the growth must not be a potential threat to the company but a means of becoming the market leader in the car selling business. References Heizer, Jay. (2005). Operations management. Prentice hall. Field, JM. (2004). managing quality in the e-service system: development and application of a process model. POMS, Retrieved from http://www.atypon-link.com/POMS/doi/abs/10.5555/ijop.2004.13.4.0.6 Chase, RB. (1997). Production and operations management: a life cycle approach. McGraw Hill. Vollmann, T E. (2000). Teaching supply chain management to business executives. operations management. BOYER, KENNETH. (2009). Competitive priorities: investigating the need for trade-offs in operations strategy. Wiley Interscience, Retrieved from http://www3.interscience.wiley.com/journal/121569134/abstract?CRETRY=1&SRETRY=0 Corswant, F. (2002). Sourcing trends in the car industry. International Journal of Operations & Production Management, Retrieved from http://www.emeraldinsight.com/Insight/viewContentItem.do?contentId=849416&contentType=Article Mukhopadhyay, T. (1995). Business value of information technology: a study of electronic data interchange. MIS quarterly, Retrieved from http://www.jstor.org/pss/249685 McAdam, R. (2001). Integrating business processes for global alignment and supply chain management. Business Process Management Journal, Retrieved from http://www.emeraldinsight.com/Insight/viewContentItem.do?contentType=Article&hdAction=lnkhtml&contentId=843471 Maia, J L. (2010). Title: exploring variables of transaction costs in brazilian automotive supply chains. Industrial Management & Data Systems, Retrieved from http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=E6267911EB842754C97BAE2F89348E4F?contentType=Article&contentId=1858107 Read More