Masterand : Pavi Antoni D.

Villaceran

Subject :Production and Operations Management and Development

Case Analysis : Consolidated Electric; Inventory control

Professor : Eddie E. Llamedo, D.M., Ph.D.

Facts:

Consolidated Electric is a wholesale distributor of electrical products primarily to

electrical contractors. The company wants to design a system for inventory

management of the 20,000 line-items carried in stock. A description is given in the case

of the business environment and the current inventory control system in use.

Since this is a wholesale distributor, the inventory management is an Independent

demand which is influenced by the market conditions outside the company. Currently

they are using a Cardex system which is outdated and is not an acceptable or cost

effective way to manage inventory in today’s business.

Consolidated Electric operates through four warehouses in Iowa (Des Moines,

Cedar Rapids, Sioux City, and Davenport). From these sites, contractors in Iowa,

Minnesota, Nebraska, Wisconsin, Illinois, and Missouri are supplied with a wide range

of electrical equipment, including wire, electrical boxes, connectors, lighting fixtures, and

electrical controllers. The company stocks 20,000 separate line items in its inventory

purchased from 200 different manufacturers. (A line item is defined as a particular item
carried at a particular location.) These items range from less than 1 cent each to several

hundred dollars for the largest electrical controllers. Of the 20,000 line items, a great

many are carried to provide a full line of service. For example, the top 2,000 items

account for 50 percent of the sales and the bottom 10,000 items for only 20 percent.

The remaining 8,000 items account for 30 percent of the sales

Issue/ Problem of the case

To begin, a situation that I deemed an issue for the company To improve their

customer relations and cost objectives, important issues and trade-offs in an inventory

control and ordering system for Consolidated Electric.

Alternative course of Action

To meet the customer’s objective, which is to maximize customer service and to

minimize costs it is imperative that they update their manual system into a computerized

system for all inventory management. For the Inventory Management System to be

effective, the following requirements would need to happen:

1. Computerized system to keep track of inventory

2. Reliable forecast of demand

3. Knowledge of lead times

4. Reasonable estimates of holding costs, ordering costs and shortage costs

5. A classification system

Two of the most important issues in inventory control are order quantity and order

timing. My recommendation is to utilize an order-point method which would use a fixed

order quantity system (Q systems) which has variable time between orders and uses
the EOQ formula. With this system, the on-hand inventory balance is what triggers an

order to be submitted.

Consolidated Electric should incorporate a “Perpetual Inventory System” which is as

system that keeps track of removals from inventory continuously, and monitors the

current levels of each item. The classification system that I recommended was the ABC

Classification system which controls inventories by dividing items into 3 groups A, B,

and C respectively. Group A is going to consist of the highest monetary value which

should account for approximately 20% of the total inventory usage. With this level of

control will help with any concerns with cost benefits as Group A which is the highest

value would be reviewed on a regular basis and Group C which is the lowest value are

not reviewed and orders are placed directly.

With the order-point method, the economic order quantity (EOQ) formula should be

used which the demand rate should be constant, recurring and known. Lead Time

should not vary, item cost is constant with no discounts, and ordering is done in lots or

batches. The EOQ model minimizes the sum of carrying or holding costs as well as the

setup or ordering costs. Determinants of the Reorder point are the rate of demand, the

lead time, stock out risk (safety stock) and demand and/or lead time variability.

If CE follows the recommended inventory control systems, they should be able to avoid

stock-outs which will keep customer’s happy and coming back. Also, using the EOQ

model and the replenishment philosophy the system should signal the buyer when the

inventory level of an item needs to be replenished which, considers the consumption of

the item during order lead time and the quantity required for the safety stock.
Best Alternative Action

Consolidated inventory management has several problems. They periodically check

inventory to purchasing staff without reviewing delivery history, demand and

forecasts. The computer inventory system should also be reviewed. Stocks need to

be reviewed on a regular basis and the flow from the warehouse should be

assessed daily. Also, you can adjust the lead time to the minimum inventory level,

replenishment can be done quickly, and out-of-stock can be avoided. ABC inventory

management method is adopted, not all items are managed uniformly, it is a method

to classify and manage it according to its importance into ABC. By classifying by

importance, it can be used for change of product contents, price, review of purchase

etc. After evaluating the product, we decide to continue or stop warehousing of the

item.

Conclusion

It is easier for consolidated warehouses to supply four or more warehouses to one

warehouse. It is necessary to arrange warehouses around small regional supply

centers. To achieve customer’s goal which is maximizing customer service and

minimizing costs, it is imperative to update the manual work to the inventory

management system. Need to become effectivity for inventory management system

estimation of allowable cost, ordering cost, shortage cost.

There are several upsides for Consolidated Electric to have an inventory control system.

Time is the biggest upside for Consolidated Electric to have an inventory control

system. Having parts on hand which cuts down on order fulfillment time. Uncertainty is

also an important factor. Inventory is intended to be used as a buffer to meet

uncertainties in supply & demand. It is also important for the movement of goods from

place to place. Economies of scale are another reason why inventory control is

important. Buying in bulk reduces costs. This allows Consolidated Electric to keep their

prices low, passing the savings on to their customers.

Consolidated Eclectic due to the nature of their business should install a

continuous review system. In Continuous review systems the inventory can be

monitored continuously or after each transaction. When the inventory drops below a set

point a set quantity is ordered.

A continuous review ordering system will eliminate the risk of keeping too much

inventory, which will keep warehouse sizes appropriate; keeping storage costs low. The

ordering system will also prevent running out of stock and the obsolescence &

deterioration issues.