Executive summary
Harvey Industries assembles high pressure washer systems and sells spare parts for those systems, though it primarily assembles equipment for coin operated self-service car wash systems (Stevenson, 2008).
The company has been experiencing losses for the past three years, hence the need to evaluate possible changes to Harvey Industries’ current inventory management system and develop strategies that may improve on the bottom line. Inventory control has a direct impact on the profitability of Harvey Industries since it’s an assembling company, and most of its assets are in form of inventory.
Inventory control problems arise when a company does not have the correct set up to estimate the number of items that it should purchase with each order in order to minimize costs while still have sufficient stock levels to satisfy demand (Shim & Siegel, 1999). It is important for a business manager to realize that it is an economic cost if one orders a large quantity of items which have to be stored for too long before they are sold.
This is because the large stock holds a lot of capital which could otherwise be used in buying other items for sale. On the other hand if one orders a few items for sale he will incur relatively low storage expenses but may not be able to satisfy all the clients. An economic order quantity system will ensure that both costs are minimized but inventory is stored at appropriate levels (Bose, 2009).
Inventory management problem
Harvey Industries faces an inventory management problem due to the lack of adequate management and control measures. In the current inventory management system, stock is replenished by any one of the key undersigned personnel who notices a shortage in inventory levels. This is potentially dangerous for the company since stock levels are not monitored on a continuous basis, thus the risk of going out of stock for some items because no one noticed the shortage.
This also presents a challenge for the purchasing manager who will have to make infrequent, and at times random, orders to suppliers for parts which makes budgeting difficult. Random orders will also subject the purchasing manager to changing market prices, where he will be forced to take parts at their current levels or face having shortages (Lewis & Slack, 2003).
Lack of a proper budget will also make the purchasing manager miss out on quantity discounts offered by suppliers, which could improve the company’s bottom line (Greasley, 2009). As there is a steady demand for repair parts due to the rugged and constant use of car wash equipment, having frequent shortages of parts is expensive for the company in the long run.
Harvey Industries has a well organized stock room, whereby parts are arranged separately according to each vendor. While this makes it easier to locate a particular part that is manufactured by a particular vendor, it could prove to be problematic to identify shortages in a particular part regardless of the vendor since they are stored separately. This could explain some of the shortages and out of stock scenarios that the company has been experiencing.
The improper inventory control system implemented by the company also lacks adequate control features, due to the company insistence on the use of as minimal paperwork as possible. No paperwork is filled out in the stockroom for items needed on the assembly floor, whereby anyone from the assembly floor can take any item needed on the assembly floor. This presents security threats for items in the stockroom due to misappropriation.
Employees may also be tempted to steal items in the stockroom, and lack of accountability due to lack of paperwork will only add onto the company’s losses. Items stored on the shop floor, such as nuts, bolts and washers, are not monitored and cause costly downtimes for Harvey when they are out of stock.
All these are indicators of a poor inventory management system, which limits Harvey’s ability to make profits. The improper inventory management model employed by the company makes it hard for the company to implement and stick to a budget, while still keeping all its customers satisfied.
Potential solutions
An economic order quantity method may prove to be beneficial to the company. In the economic order quantity model, a firm establishes how many items it should purchase with each order, and the number of orders per year. The method is advantageous in that it allows the company to minimize ordering and storage costs, while still enabling it to store adequate inventory levels to meet demand, and also take advantage of quantity discounts (Kumar, 2008).
Control checks in the company will enable it to better manage its inventory by ensuring that there are adequate controls when it comes to inventory. Control checks will bring about accountability, which reduces losses incurred due to mismanagement and misappropriation of inventory items. The company could also look into cheaper alternatives for its parts in order to reduce purchase costs.
Key elements
Key elements while considering the specific solution include cost and time constraints. It’s also important to factor in the appropriate inventory levels. Order costs depend on the size of the order, whereby quantity discounts tend to be offered with increase in quantity of items purchased.
The lead time is also important to note since waiting until an item is out of stock before ordering it causes downtimes in business, which subjects the company to opportunity costs. Demand cycles are important since Harvey will have to ensure that it is always stocked during the peak demand season.
Recommendation
Harvey Industries should implement an economic order quantity, whereby the company establishes how many parts it will have to purchase with each order, as well as the frequency of the orders. This will make it minimize both inventory order and storage costs, while enabling it to keep sufficient inventory levels to satisfy its demand.
An economic order quantity system also takes lead time of inventory orders into consideration; hence the system will help reduce some of the downtime moments experienced in the organization. Minimal downtimes will mean that the company will minimize its opportunity costs incurred whenever business stalls because the company is out of stock for a particular part.
The economic order quantity will consequently go a long way in eliminating part shortages in the assembling company. Harvey’s current system relies on individuals to ‘discover’ shortages in parts before making an order.
The economic order quantity model will specify when to purchase parts, thus staff can focus on other crucial tasks while store inventory levels are managed optimally by the new system. The economic order quantity will establish reorder points for stock items, and therefore ensure that such items are always in stock in order to satisfy demand.
Implementation and control
Harvey Industries could start implementing the economic order quantity model by the second quarter of its financial year. Implementing the model in between the year may cause disruptions in the work order but this will ascertain that the benefits of the method are experienced as soon as possible in order to turn the company back to profitability as soon as possible.
Division of tasks is important for the company, whereby either the purchasing manager or the manufacturing manager should be tasked with control of stock and employing the economic order quantity model.
The chosen manager will have to start carrying out the laid in procedures as soon as possible, while assigning inventory management to one person ensures that there is control and accountability when it comes to inventory. As an assembling company, a large proportion of Harvey Industries’ assets are in form inventory, hence the need to establish sufficient control systems.
References
Bose, D. C. 2009. Inventory Management. New Delhi, Delhi: PHI Learning Pvt. Ltd.
Greasley, A. 2009. Operations Management. New Jersey, NJ: John Wiley & Sons.
Kumar, S.A, 2008. Production and Operations Management. New York, NY: New Age International.
Lewis, M. & Slack, N., 2003. Operations Management: Critical Perspectives on Business and Management. New York, NY: Routledge.
Shim, J.K. & Siegel, J.G., 1999. Operations Management. Hauppauge, NY: Barron’s Educational Series.
Stevenson, W.J., 2008. Operation Management. New York, NY: McGraw-Hill Higher Education.