Consolidated Electric Company is among the largest electrical wholesalers that provide supplies and equipment to electrical contractors. It operates throughout the Midwest having four warehouses from which contractors in Nebraska, Iowa, Wisconsin, Illinois, Missouri, and Minnesota are supplied with various electrical equipment (Schroeder & Goldstein, 2021). In general, Consolidated Electric stocks 20,000 separate line items purchased from 200 manufacturers and ranged from 1 cent to hundreds of dollars per each (Schroeder & Goldstein, 2021). However, demand is distributed unevenly – thus, the top 2,000 line items, 8,000 items, and the bottom 10,000 line items account for 50%, 30, and 20% of the sales, respectively (Schroeder & Goldstein, 2021). The company’s inventory is currently managed on the basis of an “earn and turn” concept with a target ratio of 2.0. While this concept is beneficial for control over entire product lines and the business’s overall profitability, with individual items, it demonstrates poor applicability. As a result, some items are frequently in excess supply, while others are constantly out of stock.
The inventory reordering done by the purchasing agent periodically is based on a particular supplier’s records that reflect the quantity of items stored and the order point. At the same time, the agent does not consider items’ demand and history of orders. In addition, additional items close to their reorder points are frequently added to all items’ total quantities in order to reach the purchase minimums for discounts (Schroeder & Goldstein, 2021). While Consolidated Electric is currently using basic software, it aims to switch to a new and more advanced software, however, the company’s owner has concerns related to the efficiency of formulas for calculating reorder points and quantities used by the organization. At the same time, Consolidated Electric has already faced inventory management problems that impacted the quality of customer service. For instance, the company’s lead time has already reached 20 days (Schroeder & Goldstein, 2021). Taking into consideration the current situation, it is possible to conclude that the company requires a new inventory control system that will positively affect customer satisfaction, improve overall performance, and help meet cost and customer-service objectives.
As a matter of fact, an inventory control system plays a crucial role in the development of businesses of all sizes. First of all, it ensures that customers’ needs are met as requested products are available and delivered in a time-sensitive manner. As a technology solution designed for the management of a company’s items through all stages of the supply chain, a proper inventory control system contributes to the maximization of profits and the improvement of the overall quality of performance (“What is an inventory control system?” n.d.). For Consolidated Electric whose demand is independent and “influenced by market conditions outside the firm,” quality customer service is highly essential (Schroeder & Goldstein, 2021, p. 298). According to the company’s owner, affordable selling prices and excellent customer service are two factors that determine Consolidated Electric’s survival in an extremely competitive business environment. That is why the company should update its system for inventory management and move from a manual to a computerized one to minimize costs and maximize the quality of customer service. Moreover, a new system should address several specific requirements, including the inventory tracking system, a classification system, reliable estimation of demand and costs, and the assessment of lead times.
First of all, Consolidated Electric should assess the history of orders to determine what items and in what amounts consumers bought, are buying, and expect to buy in the future. Thus, the company should use a forecasting method to predict how products will be purchased during a year on the basis of previous years’ history (Rheude, 2020). The expediency of this approach is explained by the fact that a typical item’s history shows that demand differs depending on the month. As a result, order points for every line and stock lists for the company’s warehouses will be established on the basis of customers’ forecasted needs. This strategy will allow to avoid ordering unnecessary stock, reduce the amount of rarely purchased items, contribute to the optimization of inventory, and minimize the risks of its excessiveness.
For a new inventory control system, it is essential to determine the method of review that will be placed on its basis – whether it will be periodic or continuous. In periodic review, records should be updated manually after particular periods of time, while in continuous review, records are updated automatically and in real-time (Sherman, 2019). For Consolidated Electric, it is recommended to apply a continuous review system, known as the Q system or a fixed order quantity system, that will monitor every stock position on a constant and continuous basis (Schroeder & Goldstein, 2021). An order will be placed automatically when the position reaches its reorder point. This system has several important advantages – first of all, it provides control over inventory, and it reviews not only items on hand but items on order as well preventing stock-outs that may negatively impact customer satisfaction. In addition, the Q system contributes to the minimization of costs as it helps fulfill irregular demand.
Consolidated Electric should introduce a perpetual inventory system that will establish control over inventory and contribute to the optimization of inventory and the minimization of costs as well. Tracking inventory in real-time, this system scans an item’s barcode every time it is sold or received and places information in a unified database (Ellison, 2020). It provides an in-depth analysis of inventory changes and a more accurate prediction of demand in the future, allows to determine order points on the basis of demand, and facilitates control as manual inventory counts will be unnecessary (Chen, 2020; “What is an inventory control system?” n.d.). A perpetual inventory system is particularly beneficial for companies with several locations and multiple product lines.
At the same time, according to demand, different lines require different levels of control. That is why it is recommended for Consolidated Electric to incorporate the ABC classification system. All items will be divided into three groups on the basis of their percentage of the sales (“ABC inventory classification,” n.d.). Thus, the company’s top 2,000 line items, 8,000 items, and the bottom 10,000 line items will be placed in A. B, and C groups, respectively, and the items from the first group will be monitored more frequently. This system provides additional control over products with a high demand to guarantee their accessibility for consumers and the absence of delays. Thus, it contributes to the improvement of customer service quality.
The “earn and turn” concept used by Consolidated Electric does not work with single items and may contribute to stock-outs that negatively impact customer service. In turn, the company should apply the order-point method with the following formula of the EOQ model to calculate reorder points and quantities: Q = √2SD/iC.
In comparison with formulas used by the company, this one provides more flexibility and may be applied to any line. At the same time, other formulas for the determination of delivery delays, safety allowance, and order points are applicable. In general, the EOQ model contributes to the minimization and optimization of various costs, including holding, carrying, and ordering ones.
All in all, by applying various methods, Consolidated Electric should aim to reduce low-selling items’ inventory size remaining them still available, avoid excess inventory, and establish strict control over lines, especially top ones, to avoid stock-outs that affect customer satisfaction due to delays. At the same time, there is an additional recommendation for the company that may be regarded as more fundamental but beneficial for the company’s objectives in the longer term – and it is the reduction of the number of warehouses and the introduction of the network of smaller supply centers. First of all, it will be more cost-efficient to supply one or two warehouses instead of four. In addition, local centers may be stocked with items in high demand, and delivery to them is affordable for the company, saves customers’ money, and avoid delays. In other words, customer service will be provided in a time-sensitive manner. At the same time, if a customer orders items in low demand, he will be aware of potential delays connected with their unavailability in local centers and delivery from the warehouse. In this case, customer dissatisfaction due to unexpected circumstances will be minimized.
References
ABC inventory classification. (n.d.). Web.
Chen, J. (2020). Perpetual inventory. Investopedia.
Ellison, G. (2020). How to use a perpetual inventory system for your ecommerce business. ShipBob.
Rheude, J. (2020). Demand forecasting: Types, methods, and examples. Red Stag Fulfillment.
Schroeder, R., & Goldstein, S. M. (2021). Operations management in the supply chain: Decisions and cases (8th ed.). McGraw-Hill Education.
Sherman, F. (2019). What is the difference between a periodic and continuous inventory review policy?Chron.