Purchasing and Inventory Management - Best-Buy Auto Group - Case Study Example

Purchasing and Inventory Management Name Institution Course Date Purchasing and Inventory Management Introduction As the newly appointed purchasing manager at Best-Buy Auto Group I take this chance to address issues pertaining to the purchasing and inventory management among all dealerships the company owns. The following is a diagnosis of the weaknesses and the difficulties that the company faces. The Best-Buy Auto Group practices a decentralized purchasing and parts management whereby each dealership has its own staff for these functions. Each dealership performs its own independent sales forecasts based on historical data, service promotion and special vehicle sales. Although the decentralized purchasing has its own advantages to the company, it also has its share of shortcomings. It is good since the local purchasing and inventory management personnel are well aware of factors and upcoming events in an area. The personnel have a sense of ownership and control which give them motivation in their work. Additionally, personnel at this level can anticipate special promotions that are exclusively local in nature. Decentralized inventory management is a major cause of problems experienced in the Best-Buy Auto Group. The personnel in each dealership is apparently, managing inventory on a highly subjective basis. This usually happens even when sophisticated tools are in place. Local inventory managers overreact to transient events in their respective dealerships. These managers have are unfair in backing for high level of inventories being visually available at their locations. Coupled with the fact that each dealership has its own separate warehouse, this creates a large need for inventory at hand. For this reason, the company recently became financially overstretched since every dealership focuses on its own need rather than concentrating on Best-Buy Auto Group as a single unit. Furthermore, decentralized inventory management does not take advantage of unique, advantageous buying chances as the company’s information resides at different locations. The company faces a situation in which it has excessive inventory in stock, which unfortunately, is not moving quickly enough. The problem is not isolated to this company only; actually, this is a major problem for most businesses. Business cash-flow comes from timely-moving inventory. The company has financial difficult since it has bought a high level of inventory, which is not moving as rapidly as it should. In the end, the company looses money since the inventory held-up capital could be used on other fast-moving products that are profitable. The dealerships are using a narrow measure of performance in their sections of the business. Every company should evaluate its performance regularly in order to realize how the business is doing and where focus is needed. In the case of Best-Buy Auto Group, the process is too narrow to encompass the crucial factors and aspects in the company. Overlooking on some areas has made the company to have an inventory stockpiling, which is impairing the company (Rego 2006, p.115). The company has limited available space as a result of holding bigger levels of inventory. Although the high level of inventory improves availability to the customers, the warehouses are currently operating below the established productivity and safety standards. There are cases of too much wrong inventory, some products that take long to sell and thus occupy space for too long in the warehouses. Utilization of space in the warehouses is superb, however, poor management of the inventory in other aspects has been extremely poor. Shift in demand of some seasonal products has led to the escalation of the holding costs (Turnbull 2004, p. 5). These weaknesses and problems in the company call for restructuring of the whole purchasing and inventory management function. This report aims at coming up with new ways in which the company can improve efficiency in purchasing and inventory management. This will involve measures to improve warehouse utilization and purchasing without necessarily jeopardizing the service level of the dealerships. Through ‘whole of organization’ approach, in the purchasing, supply chain, and inventory areas, the company will be able to overcome the various challenges that concern the management (Rego 2006, p.115). Literature Review Parts and accessories inventory for servicing and maintenance of various machines require an immense amount of investments in several businesses and companies. Inventory management of this nature is a complex task due to the slow moving and large number of different items involved. There are crucial dimensions of supply chain responsiveness with regard to the role of inventory in maintaining customer satisfaction. Inventory is arguably the driver or the destroyer of supply chain responsiveness. These discussions deal with the analysis and evaluation of inventory, which is a company component that on many occasions slows down the progress of an organization if not handled appropriately. Sometimes the inventory contributes well to demand and supply responsiveness in the short-term only to become a huge challenge in the long term (Chopra and Meindl 2004, p.35). This section looks at some best parts and accessories management approaches and also, the company’s responsiveness in relation to inventory. The Impact of Inventory and Nature of Supply Chain Responsiveness Chopra and Meindl (2004, p. 35) explained that supply chain responsiveness as “ includes a supply chain’s ability to do the following; Respond to wide ranges of quantities demanded; Meet short lead times; Handle a large variety of products; Meet a very high service level; Handle supply uncertainty.” This explanation fits well into the case of Best-Buy Auto Group which deals with a wide range of products and quantities and meets high service level which it seeks to streamline. In our case, responsiveness can be understood as the supply chain system characteristic that equips it with the efficient performance capability with regards to a wide range of market requirements. They conclude that, the management should seek inventory increment without reduced flow time or raised cost. In a supply chain, the relationship between flow time and inventory is synonymous. Flow time is the time between receipts of inventory and when it is sold or used, a reduced flow time is an advantage in the supply chain (Blackburn 1991, p.47). Responsiveness is when a customer gets an order when he wants it. On the contrary, holding high levels of stock to satisfy orders is destroying responsiveness. Supply chain responsiveness incorporates several dimensions, which emphasize that the effect of inventory varies depending on the considered dimension. At the micro-level, the inventory role is neither insignificant nor neutral. The impact of inventory according to most literature is probably more negative than positive. Inventory has large negative downward demand shift responsiveness but positive upward demand shift responsiveness. There are various dimensions of supply chain responsiveness discussed by various authors. There is the unpredictable upward demand shift which is the capability to serve an unexpectedly rise in demand. In this case, the inventory helps to satisfy on time delivery and brings a positive impact (Chopra and Meindl 2004, p.57). The other is intra-product line demand shift, referring to the ability to satisfy orders when one product demand increases causing the other’s to reduce. This happens when there is a volatile demand with a line of product. In this case, stock raises the responsiveness for the demand rise, and has a negative impact on the product whose demand has reduced. The third one is unpredictable downward demand shift in which a single product’s demand suddenly drops. The high inventory level causes business to take long to adjust to the lower demand. Another dimension is decrease in customer lead time where customers reduce their waiting time and the inventory acts as a benefit as it utilizes the buffer. The above dimensions are mostly affecting Best Buy Auto Group. The company has to equip itself well in order to have a good responsiveness capability. The company needs to hold inventory that will have a positive impact on its operations. Inventory can be beneficial or harmful depending on how the organization manages its inventory management function. Spare parts inventory control They are not like other types of inventories (Muckstadt 2004, p.277). Different authors have put forward crucial factors in management of spare parts inventories. They include clients who have many expectations in relation to product quality. Parts and accessories have to be made available. Secondly, some parts have higher demand than others but the vast majority has an intermittent demand. Products’ complexity increase and reduction of life cycles cause a rise in the risk of obsolescence. The spare parts’ life cycle is related to life cycle of the final products that use them, in our case, this would be, the vehicles serviced. Several factors affect demand for parts such as the season and special sale opportunities. Most spare parts have intermittent demand, characterized by long and variable periods without demand. This type of demand is hard to forecast and shortages lead to heavy costs. Demand forecasting is crucial for planning on inventory levels. The inventory management section should be aware of forecast errors, in order to determine the right safety stocks. Other authors differ on the time bucket with Eaves and Kingsman (2004, p.435) suggesting use of monthly data. Ghobbar and Friend (2003, p.202) support forward weekly data while Gutierez and Solis et al. (2008, p.415) are for daily demands. Other authors developed on a more accurate intermittent demands approach which involves calculation of variance and mean of demand in lead-time. The Single Demand Approach considers three variables which include lead-time, time intervals between occurrences of demand, and lead-time demand. Some methods are outdated for instance, exponential smoothing of demand, which had increased errors. Willeman, Smart and Schwarz (2004, p.56) came up with intermittent demands predicting models that used bootstrapping technique to measure lead-time demand. The method takes account of autocorrelation and develops small demand variations to the original series, known as jittering. There are other authors who have come up with various methods of forecasting intermittent demand. Items classification is an important part of inventory management systems. Classification helps to assess the level of attention that the management ought to give to various items. Classifying enables to determine on the methods of forecasting and inventory control used. Furthermore, it is through item classification that a company is able to develop various performance goals in relation to service levels and inventory turnover among categories. Zhang, Hoop et al. (2001, 192) came up with a model utilized for the minimization of parts inventories subject to replenishment frequency and average service level constraints. In the formulae, [Di / (ci2 · Li)], the value (i) for each item is calculated, where C is the unit cost, D is the average annual demand of an item while L is the average lead-time. These are just a few methods developed for classification of items of inventory. When there is a limited storage space for spare parts, the company should make the decisions to store or not to store. Sometimes it is economical to acquire the item on demand rather than incurring the storage cost on it. A case study on Brazilian automotive dealers recorded use of various criteria for storage decisions. They included storing parts that had demand in the previous 3 months; another option was those that recorded 4 out of 6 months’ demands. The third option included allocating decreasing weights for the past 6 months and then adding them up to assess on a six point threshold. Many experts on inventory control are against not storing items and support minimum storage to serve unexpected demands (Rego 2006, p.115). Inventory Management Concepts and Discussions For Best-Buy Auto Group to improve efficiency so as to help address the current issues facing the company, it has to adopt new management concepts. First the company will have to integrate its inventory management from a decentralized structure, to a largely centralized one. Secondly, the company has to implement modern inventory management approaches that utilize capital more efficiently and enable high profitability such as Pareto analysis, just-in-time model and accurate response. As it is the case for now, the company has adopted an efficient supply chain and its current growth needs a responsive supply chain. An efficient supply chain features continual demand, forecast based, extensive product life cycle, low product variety and contribution margin. This type of supply chain Best-buy intends to stock has low capacity cushion and in most cases deals with finished goods inventory (Li 2007, p.13). Responsive supply chain is the best method for an automobile business like Best-Buy Auto Garage. The characteristics of a company using this approach match the company’s profile. Among them include a fluctuating demand, high product variety, and the immense need for a high contribution margin. As responsive supply chain requires, the company deals in automobile parts and accessories, and its supply selection features a flexible, fast-delivery, and a high performance design quality (Li 2007, p.13). The main aim of responsive supply chain is to ensure timely reaction to the market demand. The company will adopt an efficient means of delivery to ensure that inventory is available at the dealerships whenever needed for services or sales. 1. Just-In-Time (JIT) This method highlights the critical role of managing lead-time effectively. It aims at reducing the lead-time to present huge opportunities for service and sale upgrading. In this arrangement, dealership will receive parts and accessories when they actually need them. The concept was developed to reduce holding costs and to increase production/service flexibility and responsiveness, which Best-Buy Auto Group needs at the moment. This method works well with other management practices such as employee participation, continuous improvement and total quality control. The method has a few critical components for its smooth execution. It has small lot sizes that provide the organization with benefits of lessened holding costs, and more flexibility with regards to the market demand. The concept has also reduced lead-time, thus it takes a short period from when the business makes orders to when it gets them (Hugos 2003, p.6). JIT concept embarks on a preventative maintenance, which is critical due to the presence of a high degree of automation. The organization must introduce a close relationship with suppliers as it needs on-time deliveries of high-quality materials. The company will source each item from a sole supplier to establish loyalty, efficacy and quality. The work force shall be flexible to serve competently during peak seasons in their respective dealerships. 2. Accurate Response This concept concentrates on forecasting, planning, and manufacture. Accurate response increases speed in the supply chain. Consequently, managers can obtain resourceful market information in order to determine production requirements better. This concept relies on flexible sale or production and short cycle times to reconcile demand with supply. The accurate response helps the business to become more competitive by applying advanced technology and modern management techniques. Best-Buy falls under a seasonal industry, which makes it acquire large amount of inventory, some of which it does not need to satisfy the actual demand. When using this concept, the management will consider the effect of missed sales opportunities by assessment of stock-outs. The business will classify various products as either relatively predictable or relatively unpredictable. Historical data and expert opinions determine the product classification. The above elements assist the organization to understand their operations well and streamline the supply chain from the number of branches to the supplier networks (Turnbull 2004, p.4). An example of categorizing method is Pareto Analysis, which is a technique utilized to choose a limited number of products that have a significant overall impact. It follows the Pareto Principle commonly known as the 80/20 rule with the idea that 20% of the total effort is responsible for 80% of the success of doing the whole task. In quality improvement, majority of challenges in the organization result from 20%. The Pareto Principle is also referred to as the vital few and the trivial many. Using this analysis the Best-Buy Auto Group can determine the 20% of products that account for the 80% of earnings; the 20% of sales that result to 80 % of the revenues; and the 20% of products that cause 80 % congestion in the warehouses. The principle was named after Vilfredo Pareto, an Italian economist who analyzed that 80% of national income in Italy was attributable to 20% of the population (Turnbull 2004, p.5). Benefits of Accurate Response When products are categorized as predictable or unpredictable, selling can be adjusted. The predictable parts and accessories in this case can be purchased further in advance to allow capacity for the unpredictable peak season. This will eliminate holding up capital in form of slow-moving parts and accessories at Best-Buy Auto Group. It reduces mismatch costs, which are additional costs related to excess supply, and thus the company can reduce prices. Businesses escalate costs due to inaccurate forecasts in regards to prices. Reduced prices form a crucial competitive advantage for an organization. There is point-of-sale data collection to record consumer behaviour. The company can apply this data in evaluating the purchasing patterns of customers. Use of accurate response will enable firms to expand their businesses, product line, and branches in order to give the products/services the consumers demand (Li, 2007, 13). 3. Centralized Management of Inventories The company will bring together its purchasing and inventory management function to be done centrally. This will enable professional inventory managers and purchasing officers to join the company to rejuvenate the business pro-actively. The employed individuals will work with integrated data platform that enables to compile, analyze and evaluate information of all the dealerships. The current decentralized inventory management at Best-Buy has neither technical strength nor efficiency. The company needs to have a strong integrated software system. Some software applications such as MARS-IW have the power and features that make central inventory management a good undertaking. A centralized inventory management can take advantage of special buys and other economies of scale benefits. It enables a company to adequately optimize company decisions. The inventory management of the main parts and accessories of the company will be centralized with a warehouse in place. Most of the genuine parts and accessories will be purchased centrally since they require efficient management to maintain a high level of services. Additionally, hand dealerships will purchase some of parts and accessories mainly non-genuine parts that are provided by local suppliers in their respective areas. In the end, the central warehouse will address the problems of holding too much inventory and a limited warehouse space. However, executive orders with regards to inventory management will originate from a central place (Ghobbar 2003, p.2110). 4. Milk Run Delivery Since the purchasing department ought to be centralized, there is need for an efficient form of transport. A central warehouse will be utilized for common inventory shared by all dealerships. There will be transport from the single location to the multiple receiving dealerships. This method has an advantage in that it uses the mode of transportation efficiently and keeps the costs low. The method seeks to deliver few and large deliveries in order to utilize the space available in the mode of transportation. It also allows summation of various products from various locations to fill the vehicle capacity. Many small amounts of inventory are delivered to the various locations via a single truck. According to Hugos (2003, p.6), the milk run delivery has two techniques namely the saving matrix and the generalized assignment techniques. i. Saving matrix Technique – a simple technique utilized to allocate vehicles to customers and analyze the routes. It looks at delivery time at serviced locations among other constraints. This method is wide and can be modified to take in various constraints. It gives a logical calculated route solution that is put to practical use. However, it fails to address many constraints. ii. Generalized Assignment Technique- The technique gives a better solution since it is more sophisticated and uses the saving matrix technique. It is used when the carrying capacity of the carrying vehicle is the only constraint on the delivery schedule. However, more constraints on this method make the technique harder to provide appropriate delivery schedules (Li, 2007, 330). Conclusion The company will use different approaches and techniques in order to handle the challenges it faces. Currently, the company has two challenges, outstretched finances and a limited storage space in dealerships warehouses. The literature review concerns the impact of inventory and nature of supply chain responsiveness. The company faces four dimensions of responsiveness that include unpredictable upward demand shift, intra-product line demand shift, unpredictable downward demand shift and customer lead time. The responsiveness is the business ability to handle the changing business environment. The parts and accessories have an intermittent demand, meaning not consistent but fluctuating. It is clear that accurate forecasting plays a vital role in achieving efficiency in parts inventory control. For a good forecast, various authors are torn between taking monthly, weekly or daily data. To get rid of the difficulties, Best-Buy Auto Group will adopt a few inventory management concepts that promote efficiency. Just-In-Time purchasing is a concept that reduces lead time to increase sales and present huge opportunities for service. The concept works well when there is a good relationship with suppliers. The other approach is accurate response which focuses on projecting, planning, and production. In order to make the right decisions, historical data and expert opinions are used to classify products and services in order to streamline the supply chain. Other measures will include, centralized inventory management whereby, the company will purchase and manage some goods at one place to be shared by all dealership later. This will increase efficiency due to involvement of professionals, integrated data platform and to take advantage of special buying opportunities. With the dealership sharing the inventory, it will eliminate the problems of a limited space and constrained financial capability. The last concept is the milk run delivery, which seeks to supply various dealerships via a single truck in the most efficient manner. A combination of these concepts will help the company to eliminate its current problems and achieve competence. Recommendations The company should introduce integrated inventory control software to form a well-organized management network in all its dealerships. The company should establish staff training to develop knowledge in individuals dealing with inventory with regards to new control concepts. A new selection process ought to be done in relation to suppliers in order to choose reliable parties to provide inventory in the new dispensation. A decision on a central location for the main warehouse should consider the proximity to the dealerships in order to facilitate transformation. References Blackburn, J, 1991, The time factor, in time-based competition: The next battleground in American manufacturing, Homewood, Illinois: Business One Irwin. Bozarth, C & Handfield, R 2006, Introduction to operations and supply chain management, Upper Saddle River, NJ, Prentice Hall. Chopra, S & Meindl, P, 2004, Supply chain management, Upper Saddle River, NJ, Prentice Hall. Eaves, A & Kingsman, B 2004, Forecasting for the ordering and stock-holding of spare parts, Journal of the Operational Research Society, v.50, pp. 431-437. Ghobbar, A & Friend, C 2003, Evaluation of forecasting methods for intermittent parts demand in the field of aviation: a Predictive model. Computers & Operations Research, v. 30, pp. 2097-2114. Gutierrez, R, Solis, A & Mukhopadhyay, S 2008, Demand forecasting using neural networks. 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Zhang, Q, Hoop, J, Supatgiat, C 2001, Spreadsheet implementable inventory control for a distribution center, Journal of Heuristics, New York: Springer, v. 7, p. 185-203. Read More