Case Scenario:
Firms like Wheeled Coach spend over half of their sales revenue on purchases. These purchases are often in inventory and represent a huge portion of Wheeled Coach's assets. But, perhaps even more importantly, the ambulances cannot be built if the proper inventory is not on hand when needed.
Two important inventory management techniques are ABC analysis and Cycle Counting. Wheeled Coach uses both. But effective inventory management begins at the design stage. Efficient inventory control requires knowing what is needed. Bills-of-material (BOM) provide this knowledge. Therefore Wheeled Coach spends substantial time and effort making sure the BOMs are correct. Only then does it know what to purchase and have available for the production process.
ABC analysis helps firms develop policies and procedures for controlling inventory. A items are the expensive items such as the chassis (usually purchased from Ford), aluminum (from Reynolds Metal), and plywood used for flooring and cabinetry (from local suppliers). These few items constitute the majority of the inventory values at Wheeled Coach. They are tightly controlled, from purchase to use, with effective security. Orders are negotiated to maximize quantity discounts while minimizing on-hand quantities. Some items, such as aluminum, must be ordered as much as eight months in advance. B items are less expensive and controlled less tightly. Finally, C items have less control, but all items are stored under lock and key and only removed from a secure area if they are on a BOM.
Part of the control of inventory items at Wheeled Coach is cycle counting. Under cycle counting, A items are counted on a very short cycle, perhaps once a month to verify transaction accuracy. B items are counted less frequently, perhaps every two months. And C items are verified once a quarter or even less frequently. Cycle counting provides a much more effective auditing procedure than periodic (annual) counts of inventory.
Only by driving down purchase costs and maintaining tight control of inventory can Wheeled Coach control its total costs. With 45 competitors and orders that are usually won only after a bidding process, Wheeled Coach has no alternative to effective inventory management.
1. Explain how Wheeled Coach implements ABC analysis.
2. If you were to take over as inventory control manager at Wheeled Coach, what additional policies and techniques would you initiate to ensure accurate inventory records?
3. How would you go about implementing these suggestions?