Strategic Inventory Control of Grandiose Motors - Case Study Example

Title: Report to Management on Strategic Inventory Control of Grandiose Motors Following expansion; The Roadmap retaining strategic competitiveness Name Grade Course Tutor’s Name Day, Month, Year 1.0. Executive Summary One of the key success factors in a supply chain is effective inventory flow management. The main challenge in inventory management is to determine the balance between what the organization supplies and the demand available. The company does not desire to have too much inventory due to the costs associated with carrying the stock. Grandiose Motors costs include capital costs, costs associated with storage such as risk of theft, spoilage, insurance costs, and tax costs and so on. On the other hand, the company would ideally want to ensure that they stock enough inventories to avoid lost sales due to stock outs and possible loss of customers due to inability to meet service requirements. The report proposes use of the concept of inventory optimization and just in time theories to meet this challenge. The expansion of Grandiose motors also increases the number and variety of items that the organization must carry in stock. The company thus faces another challenge of determining the best structure to acquire the inventories. Currently, inventory purchase carried at the branch levels may increase costs and with the major strategic position of the company relying on a low cost based structure, the structure of purchasing and inventory functions should reflect the changes in the company. The report proposes a change to the structure to where inventory purchases will be made from the central office. Finally, the company management policies must determine the best way to order the variety of items required. The report proposes that through use of ABC model, the company may be able to determine the level of importance of each item thus determining where most of its money should be invested. 2.0. Table of contents 1.0. Title ……………………………………………………………………………. 1 2.0. Executive summary….………………………………………………………… 2 3.0. Table of contents………………………………………………………………. 3 4.0. Introduction 5.0. Report Findings and recommendations 1.0. Background to the Problem………………………………………….4 2.0. Proposed changes in structure of purchasing functions and inventory management procedure………………………………………………………...5 3.0. Changes in Purchasing and Inventory Management Policies And Procedures to reflect the Dealerships Purchase Different Types Of Service Parts And Materials……………………………………..……………………….6 4.0. Proposed Supply-chain and inventory management concepts that would reduce investment and space requirements while at the same time maintain adequate service levels………………………………………………8 5.0 . Conclusion……………………………………………………………………... 10 6.0. References………………………………………………………………………12 1.1. Introduction Following the expansion of Grandiose motors through acquisition of new distributorship, the company faces challenges of determining the best way to manage inventories to ensure that juts the right amounts of stock are held. At the same time, the variety of items to be stock has increased. The main objective of the report is to determine how the organization may use various supply chain management theories to come up with management policies and procedures that would address the challenges of excess inventories and especially on how to maintain the balance between supply and demand. Additionally, the report determines how to deal with the issue of variety of inventories and how to structure the purchasing and inventory management functions. Finally, the report aims to determine how the company can make changes in management policies to reflect the changes in the company. The research was carried through intensive analysis of various case studies and literature that is relevant to the research problem under discussion. The report used relevant journals to determine best practices that have been successfully deployed in other organization under similar circumstances before proposing the best option for the company. The report starts with introducing some relevant literature in the field of inventory management. The report identifies the relevant concerns of management and using relevant literature makes an analysis of the companies problems. The report proposes best practices that would be ideal for the organization by making an analysis of the problems in relation to the relevant materials. The paper concludes by reemphasizing its success in determining the solution to the problems while reemphasizing the importance of using various inventory and purchasing management theories and concept to ensure that an organization maintains its competitive position. 1.2. Report Findings 1.1. Background of the Problem Grandiose company has managed to maintain its competitiveness through its ability to avail to its customers a wide range of automobiles at a reduced cost by maintaining a high turnover in inventory ,sustaining a high sales volume, and a low cost structure strategy that the company desires to retain even with expansion. Ability to offer efficient after sale, through diagnosis, servicing and repairing is another core strength of the organization and it is also dependent on timely availability of materials. Current practices at the company involve each dealership making its own purchases of service parts and materials. The purchases of service parts and materials are based on historical demand forecasts and the type of material in demand varies across the major seasons. Additionally, provisions are made for increased demand during service promotions and special vehicle sales. The number of varying materials for purchase is recognized as a challenge along with the fact that they are sourced from a range of sources and are used for different functions such as for sale or for service of customers vehicle. With growth of the company there is need to determine the best approach to maintain the core competencies and efficiencies that have contribute to the success of the company. With the company having to purchase different types of service parts and materials, such as the purchase of lubricants from a host of suppliers and spare parts from specific companies, the purchasing and inventory management policies and procedures need to be considered for effectiveness to reflect the changes. New structuring of the purchasing and inventory functions must also reflect new demands that are placed on the organization and strengths of the organization. 1.2. Proposed changes in structure of purchasing functions and inventory management procedure With respect to structuring the purchasing and inventory functions for grandiose motors dealership network an understanding of what inventory management is crucial. Inventory management involves purchasing and inventory functions, responsible for coordination of the actions of all major business segments and especially marketing, sales and production (Dessouky, 2006). Inventory management aims to ensure that the appropriate inventories levels of inventories exist to meet demand and avoid over supply. An effective inventory management should rely on forecasts and pricing of products and is executed within the organizations cost structure of a company (Christopher, 1998 ). In managing inventories, three inventory forms are involved including the basic stock, which is the exact stock required for satisfaction of demand forecast, seasonal stock, which is a build up when anticipating foreseeable future increase in demand which occur at particular seasons, and a safety stock which is the quantity that acts as a buffer against uncertainty (Buffet et al, 2004 ). The purchasing and inventory functions should ideally aim to weigh the balance of inventory towards the basic stock. In this case the companies structure would aim to hold as little safety stock as possible and have just enough amounts of seasonal stock. The predictability of demand is influences in how much safety stock accompany may opt to hold (Christopher, 1998). Buxey(1998) argues that where unpredictability is high, an organization must maintain higher amounts of safety stock. Since Grandiose motors has successfully been able to make accurate historical forecast of demand of its products within different seasons such as when there are promotions, seasonality and so on, its purchase structure should aim to maintain lower amounts of safety stock. The current structure of purchasing and inventory at Grandiose Motors involves carrying out purchases within each of its dealership. However, such a structure is usually open to over supplying, a common problem with multiple locations (Quayle, 2003). The organization should thus should opt for an inventory management where orders are determined from the head office based on the branch performance and on its needs. One function of inventory management would involve control of inventory at the branch levels. The company should be able to determine the exact amounts of each item in every location before supplying additional inventory. The pull method which allows branches to request the products they need is associated with higher than necessary inventory levels (Quayle, 2006). The firm should thus opt for a push structure where supplies will come from the central management In addition, an approach to supply chain management concept should be adopted. In such a concept, there is coordination and integration of all the functions of purchasing and inventory management including sourcing materials, assembling materials, inventory tracking, warehousing, order entry and management, distribution across branches, distribution to customers and all other activities including systems for managing information on all the activities (Buxey, 1998). Such an approach takes into consideration the relevance of inventory management to an organizations strategic management and core competencies. Grandiose motors adaptation of such a framework would ensure that it does not deviate from its core competencies of providing efficient services at the lowest cost possible. 1.3. Proposed Changes in Purchasing and Inventory Management Policies and Procedures to reflect the Dealerships Purchase Different Types Of Service Parts And Materials Purchasing and inventory management policies and procedures may differ as the dealership purchases increases the range of products that form part of the inventory. One procedure involves classification of the inventories according to importance. One of the most common classification methods is the ABC classification method. In this method an analysis of inventory to determine the more important inventory is carried out. The items that account for the largest dollar sales are classified as A class and the following are in B class and the least in class C. Since Grandiose motors has a very many products range the company must buy, if management were to allocate the same time and effort in controlling the inventory for each item, labor costs would increase due to the extra effort required. Based on ABC theoretical framework the items should be classified into different groups so that they can be treated differently thus saving not only time but also costs and effort and is especially important for Grandiose Motors considering the financial constraints and its ability to maintain its core competencies. Onwubolu (2006) asserts that in classifying each items annual dollar usage and annual quantity usage should be determined and thus identify the items that bear the largest impact on the overall cost performance of an organizations inventory, with an aim of determining the average importance of each item. The items placed in A are the most important and should be given priority, they should not only be more closely controlled, but they should also have more frequent reviews in terms of order quantity determination, forecasting, and demand inquiry. The next should have be reviewed less often and controlled less compared to A. The third group should be controlled less and reviews may be done over long periods. In addition, items in group C can have more safety stocks and can be ordered in larger quantities (Quayle, 2003). 1.4. Proposed Supply-chain and inventory management concepts that would reduce investment and space requirements while at the same time maintain adequate service levels. The organization faces the challenge of reducing investment and space requirements while maintaining the same service levels. The acquisition of new automotive dealership by Grandiose Motors, as part of its strategic growth has resulted to challenges in the ability of the company to maintain the spiraling investment resulting from larger amounts of inventories and space requirements. On the other hand Grandiose Motors faces the challenge of how to effectively manage the flow of inventories to avoid possible shortages, possible delays in supplies of materials and so on leading to poor service and possible loss of customers. The organization fears that its inability to balance the demand of inventory with supply makes the company to be at risk of losing its core competencies through inability to satisfy the demand of customers by avoiding stock outs, which may result to lost sales and poor service. The company must determine how to balance between the desire to maintain high amounts of inventories to avoid increase in lead time costs but instead resulting to increase in holding costs. The company must also avoid maintaining very low inventories with an aim of reducing holding costs consequently leading to material shortage and poor service delivery. On the other hand carrying too much inventories increases operational costs by tying crucial and limited capital, increasing warehousing and associated costs such as insurance, high capital costs based on the concept of lost investment opportunities from the held capital and so on thus leading to challenges in meeting its core strategy based on its “one price” the lowest sale price. With its major core competencies and strategies, the price strategy and service quality under threat on either case, Grandiose Motors must determine how best to ensure that they carry just enough but not too much inventories. 1.5.Supply-chain and inventory management concepts that may assist management to reduce investment and space requirements while maintaining adequate service levels One major concept that is useful in inventory management is the concept of inventory optimization. Inventory optimization involves reduction of inventories levels while at the same time meeting service levels and maximizing on capital investment (Beamon, 1998 ). Use of inventory optimization leads to better service levels, effective resource utilization and management, better return on equity and ability to meet the demands of customers (Frazzel, 2002). The gains are derived through various ways including system benefits, value addition and strategic benefits. Among the tools that an organization may use to determine optimal levels of inventories include the evolutionary algorithm model (PSO), Particle swam optimization among others. The use of particle swam optimization proposed to determine the optimal stock levels consequently factors forecasts and lead times such as time to reach each branch, other companies branches, and would aim in determining the optimal levels (Toomey, 2004). Another common practice to solve the challenge is through use of just in time concept. Just in time concept is used companywide and it establishes that an organization must eliminate all type of waste in its operational activities (Onwubolu, 2006). The just in time concept is a technique that would given sure that only high quality parts in the right quality are availed at the right place and time. While using minimum possible materials, facilities, equipment, and resources including space. After determining the optimal supplies levels, the company should adopt a just in time policy to gain the benefits 1.5. Conclusion The expansion of Grandiose Motors will continue to impart pressure on the organizations inventory, purchasing and supplies management. The organization must determine the policies and management concepts and theories that would enable the organization to meet its strategic objectives. The inventory management principles in use must thus reflect the organizations strategies by using the industries best practices. At the same time, the organization must be aware of its core competencies and any changes that occur should reflect the company’s core competencies. At Grandiose motors, the core competencies have included a low priced cost structure, high volumes low margin sales, and efficient service. The changes proposed in the report have taken into consideration all these elements and the company in utilizing this principles such as the supply chain inventory optimization, the ABC model among others should be in a better position to not only withstand the changes but to become a better company. With the new challenges posed by the expansion through acquisition of new dealership, the organization must identify what such a move portends for its organizational structure or risk inability to survive expansion.. References Abdelmaguid, T.F and M.M. Dessouky (2006). A genetic algorithm approach to the integrated inventory-distribution problem, International Journal of Production Research., 44: 4445-4464. Beamon, B.M (1998). Supply chain design and analysis: Models and methods, International Journal on Production Economics, 55: 281-294. Buffett and N. Scott, 2004, “An Algorithm for Procurement in Supply Chain Management, AAMAS- 04 Workshop on Trading Agent Design and Analysis, New York. Buxey, G. (2006). Reconstructing inventory management theory. International Journal of Operations & Production Management, 26(9), 996-1012. Christopher, M. (1998). Logistics and Supply Chain Management. London: Pitman. Frazelle, E. H. (2002). Supply Chain Strategy: The Logistics of Supply Chain Management. New York: McGraw-Hill. Krajewski, L., & Ritzman, L. (2002). Operations Management. New Jersey: Pearson Education Onwubolu, G. C., & Dube, B. C. (2006). Implementing an Improved Inventory Control System in a Small Company: A Case Study. Production Planning & Control, 17(1), 67-76. Persson, G. (2004). Supply Chain Management: The Logic of Supply Chains and Networks. The International Journal of Logistics Management, 15(1), 11-26 Quayle, M. (2003). A study of supply chain management practice in UK industrial SMEs. Supply Chain Management: An International Journal, 8(1), 79-86. Toomey, J. W. (2000). Inventory Management: Principles, Concepts and Techniques. Norwell: Kluwer Academic Publishers. Read More