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Production & Operations Management

Overview of a case study and a related article

Jill Bolmer

on 17 January 2013

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Transcript of Production & Operations Management

Company Background $10 million in sales
12th largest electrical wholesaler in the country
Supplies electrical equipment such as: wires, electric boxes, lighting fixtures and electrical controllers
Good customer service and reasonable prices
Relies on a good inventory system to make any profits Current Inventory Management "Earn And Turn Concept": Deals with Profitability Inventory New Implementations Discussion EOQ 20,000 items from 200 manufacturers
2,000 of top items account for 50% of sales
10,000 of bottom items account for 20% of sales
Remaining 8,000 items account for 30% of sales
Purge out inventory so that only items that are ordered 1+ times/year are carried Jill, Chris and Peter Inventory Management Constant Value (2.0)= (Earnings Margin)*(Inventory turn ratio)
Model makes sure that the company is making money off of a sale and also charging a reasonable amount for the product
For example, if a company sells less of a product per year they can charge more and if a company sells a lot of a product they can charge less
PROBLEMS: Works well for overall profitability but not for individual inventory items. Some items are in excess while others are out of stock Cardex System: Inventory Management Card that keeps track of orders and inventory
On-hand system
Based on judgement and past experience, not formulas
Outdated (Father started company in 1940s) Related Article Inventory Management
Drop Shipping: No actual inventory
Manufacturers send directly to customers
Didn't work because they couldn't manage manufacturer's inventory and customers were not getting product on time
Changed to a Warehousing method
Open WH 24 hrs and fulfill orders when received
Excellent customer service The End http://www.cpcstrategy.com/blog/2013/01/lessons-we-can-learn-from-zappos-part-2-of-2/ How would you design an inventory control system for this business?

How will that system help the company meet customer-service and cost objectives An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. Why EOQ? EOQ applies only when the demand for the product is constant throughout the year
The lead time is constant and known
No stock outs are allowed
Items or materials are ordered or produced in a lot or branch
The unit cost item is constant
The item is a single item, without order interactions from other items

These assumptions that match with Consociated Electrics order patterns and techniques for providing
Each product can be individually evaluated and therefore provide Henry with an indicator that would meet customer service objectives
This way Henry’s firm can control inventory while holding just enough of his low selling products to continue to have a wide arrange of products to satisfy all of his customers Consociated Electrics Application Consolidated Electric currently holds at all times 20,000 items in its inventory, half of which accounts for the bottom 20% of sales, with items costing as little as a cent.

2000 items account for 50% of sales
8000 items account for 30% of sales
10000 items account for 20% of sales

These 10,000 items at all times require storage space, resulting in high inventory costs while providing a low turnover. Inventory Costs Q System A Q System or a Quantity system ought to be implemented for the 10,000 items that result in 80% of sales.
-Sets a floor amount as to which an automatic reorder of items is put in place

Ex. 100 electrical converters are in stock. Once that number hits the floor amount of 20, inventory is automatically reordered to 100.

This Q system is beneficial in that Consolidated Electricals most profitable items are always in stock for customer purchase. A P System or Periodic Review System ought to be put in place for the 10,000 items that result in 20% of sales.
-Inventory is done at the beginning of the month.

This P system is beneficial in that Consolidated Electricals least profitable Items (Items as low as $0.01) do not consistently occupy inventory space thus driving up inventory costs. In the event that inventory runs out, the financial loses are minimal. P System Consociated Electrics
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