As a Privileged Fly I have been allowed to be on the wall of a corporate boardroom to observe the proceedings during the high-powered discussions. The case study is about a manufacturing and engineering firm that has been doing very well in terms sales but has a serious challenge of escalating freight costs. The case study reveals that the root cause of the problem is insufficient inventories and lack of planning and fragmented purchasing process.
The case study will provide a detailed analysis of the basic inventory problems confronting the firm. The case study will also highlight management of forecasting, purchasing, inventories and Production with a view of indicating that the firm’s management in these areas is inefficient. Furthermore, the case study will look at inventory management, inventory control and whether the Purchasing Manager should build up her inventory.
It will reflect the need to hold inventory as well as dangers and consequences for poor inventory control. The case study will reflect on materials management as a concept that is applied nowadays in order to streamline process and ensure system efficiency, its advantages and whether the firm must adopted the materials management approach. Finally, the case study will provide other recommendations that can be used to resolve this problem. 1. WHAT ARE THE BASIC INVENTORY PROBLEMS CONFRONTING THIS FIRM?
In every organization the purchasing department forms an integral part of the success of the department in meeting the sales, production and distribution demand and has a critical role to play in order to ensure that the organization meets and possibly exceed the expectations of the customers. It is therefore imperative for communication to flow between the Purchasing Manager and other Managers around the orders received and the status of the production department with regards to materials/parts required for a particular order. The basic inventory problems confronting this firm have been identified as ollows: – The lack of communication between the Production Manager and other Managers creates a problem in terms of establishing whether materials/parts are available as well as to enable the Purchasing Manager to plan properly and well in advance to meet the requirements of the Production Manager in terms of materials/parts or spares. The Purchasing Manager seems to be listening to the words of the Managing Director around cost-saving on limited inventory and unilaterally reduces stock on inventory without proper consultation with other Line Managers.
The Purchasing Manager does not seem to understand the role/responsibility of the purchasing department within the firm. According to Hugo, Badenhorst-Weiss & van Rooyen, (2002) purchasing and supply management is responsible for the continuous supply of all kinds of materials needed by production – in the right quantity, at the right time and at a competitive price. It is therefore clear that the purchasing department is the main player in ensuring customer satisfaction while enhancing the image and reputation of the firm.
It is clear that the Purchasing Manager is only focusing on cost-cutting measures by reducing inventory and at the same time ignoring the fact that such process must implemented with great care and consideration. As much as the firm wants to cut down on inventory it is important that the exercise is not implemented to the detriment of the firm. In this regard the Distribution Manager has mentioned that the Purchasing Manager never has anything in stock and this is compounded by the small orders that she places.
Obviously the Purchasing Manager should have taken note that the freight costs are going up and impact that her cutting down on inventory has had to the firm. Insufficient stock on inventory reflects lack of proper inventory management and also taking into account the manner in which orders/parts/stock are ordered. There is no indication whether a policy exist where consultation will be entered into between the Purchasing Manager and other Line Managers in order to ensure that orders are consolidated which would result in a saving on freight costs.
As the firm is manufacturing company it is therefore necessary to reflect on reasons for holding inventory. Sufficient inventory ensures that production is continuous and at an economic level, contributing to a lower manufacturing cost per product through efficient use of equipment and labour (Hugo, et al. ; 2002). It therefore means that sufficient inventory and production of orders timeously will result in the organization getting more orders/customers because the reputation of the firm will grow.
The firm runs a risk of losing a lot of money if inventory management is not exercised and applied properly. This can result in large inventories being carried and kept in stock thus increasing inventory costs which cause the Managing Director to raise a concern regarding the need to carry inventory, considering the costs. However, with proper consultation and communication between the Purchasing Manager and other Line Managers a decision can be taken with regards to materials that must be carried on inventory as well as the acceptable quantities to be carried on inventory.
The aim of inventory is to hold inventories at the lowest possible cost, given the objective to ensure uninterrupted supplies for ongoing operations (Hugo, et al. ; 2002). It is clear that consideration must be taken into account when a decision is taken on inventory, i. e. the materials that must be kept on inventory as well as drawing a comparison between the costs involved to hold inventory and the loss resulting from non-availability of materials.
For inventory management to be efficient and effective it is important and necessary for the Purchasing Manager to have an understanding of all elements and costs that are involved in inventory-holding. According to Hugo, et al. (2002) the elements of inventory-holding are inventory-holding costs, ordering costs, costs of shortages and set-up costs. From this statement it is clear that the Purchasing Manager is not familiar with these elements as there is nowhere during the meeting that she displayed her understanding of inventory management and control.
It appears that the Purchasing Manager has never conducted an analysis and/or compared the savings of operating on low inventories against the freight costs as there is no argument during the meeting justifying that. It is also clear that the Purchasing Manager has never bothered to reflect on the cause of high freight costs and maybe consider that the following might be the cause of the escalating costs: low/insufficient inventories, split orders in small quantities and short lead times.
The good example is reflected by the argument of the Managing Director to the effect that the freight bill is R955 whereas the cost of the part itself is less than R955. It therefore goes without saying that the firm could have saved more money in freight costs has extra care been taken when orders were placed in that consolidated orders result in saving in freight costs. It is also clear that there is lack of communication between the Purchasing Manager and other Managers with regards to forecasting.
Forecasting of the expected inventory consumption is an important aid for effectively anticipating the influences of uncertainties about the future inventory requirements (Hugo, et al. ; 2002). Forecasting of inventory consumption should begin from the time the order has been concluded by the Marketing Manager, with the latter providing relevant information regarding lead times for the order, to the Production Manager giving an indication materials and turn around time required for production, to the Purchasing and Distribution Managers.
In this regard this does not seem to happen as the Purchasing Manager is pointing a finger at the Production Manager, and the lack of communication might be a deliberate act by the Production Manager who wants to capitalize on the situation and seize control of both Purchasing and Distribution in the process. It is therefore clear that the power games that are being played by the Production Manager are affecting the firm as some of the shipment deadlines are not met and customers have began to complain which also poses a serious reputational risk. . WHAT ARE THE FACTORS THAT HAVE CONTRIBUTED TO THE DEVELOPMENT OF THIS SITUATION? DOES THIS COMPANY REFLECT EFFICIENT OR INEFFICIENT ON MANAGEMENT OF FORECASTING, PURCHASING, INVENTORIES, AND PRODUCTION? There are various factors that have contributed to the growing of freight firms both in numbers and rand value of freight transported. INBOUND FREIGHT The increase in inbound freights is caused by insufficient materials on inventories which have forced the Purchasing Manager to place orders whenever materials are required by production component.
The other contributing factor is the lack of planning and proper buying approach in that the Purchasing Manager has no ordering process in place as orders are placed in smaller quantities which is compounded by lack of early communication between the Purchasing Manager and the Production Manager regarding required production materials. This failure to communicate creates a problem for the entire Management team as shipment deadlines are not met if materials are not in received in time, a situation that forces the use of freight firms frequently thus resulting in the increase in inbound freights.
In short the more the use of freight the increase in freight costs. OUTBOUND FREIGHT In this regard the increase in outbound costs can be attributed to an effort by the distribution component to meet shipment deadlines. The shortage of materials in inventory and late deliveries of materials due to late ordering result to the production component having to work long hours in order to complete orders as well as having to use the fastest possible freight available in order to meet deliveries or to make up for the already passed deadlines.
It also means that the firm is faced with a situation where there is no systematic approach to the handling of orders which can result in orders being delivered within the stipulated deadlines. The more the late deliveries/shipment that need to be made as and when they are ready, the more the use of freight and the increase in freight costs. The efficient or inefficient management of Forecasting, Purchasing, Inventories and Production can be described as follows: – FORECASTING The firm does not reflect effective and efficient management when it comes to forecasting.
Sound and efficient forecasting involves sharing of information between Managers in order meet the customer demand, which does not seem to be happening in this regard. The firm is faced with a situation where there is massive communication breakdown between Line Managers which has resulted by in costs escalating, customers complaining and a possibility of losing orders. An effective communication structure enables the firm to operate in an organized manner as communication flow from end to end and the shortcomings and/problems are detected and resolved at any early stage with minimum disruptions to production.
Participative meetings of the management team assist the firm in ensuring that all activities are discussed properly where each Manager provides an indication of their requirements in order to enable the Purchasing Manager to have sufficient time to identify all required materials/parts that need to be ordered and to agree with the Production Manager on production materials that must be kept on inventory before orders are placed. PURCHASING
From my analysis I have concluded that the Purchasing Manager is not in total control of the purchasing process as there is no indication that any interaction exist with regards to the requirements of the marketing/production teams. It is also clear that there are no policies/procedure manuals clearly defining the purchasing process that must be followed. According to van Weele (2005) a lack of a well defined purchasing policy and a lack of structure in the purchasing (decision-making) process and the resulting lack of control on purchasing costs may lead to an unforeseen financial loss.
Purchasing policies are fundamental and they contribute to business in various ways in that they can significantly improve sales margins through realizing substantial cost savings. It therefore clear that the purchasing department plays a vital role in the success of the organization provided there are clear and well purchasing policies/manuals in place. In this particular case there has to be an improvement in the manner in which the management team communicate and purchasing policy must be developed in order to assist the Purchasing Manager to maintain and manage a buying process that is both efficient and ffective. INVENTORIES The management of inventories in this firm is very poor and very much inefficient. The shortage of materials is caused by the fact that the firm has cut down on inventory which has resulted in materials/parts not available when required thus leading to downtime which is costing the firm dearly as production department must work overtime and fastest modes of freight (which are mostly expensive) must be utilized in order to meet production and shipment deadlines.
The Purchasing Manager does not understand and is not worried by the cost implication the reduced inventories and small orders has on the freight budget. It appears that the instructions of the Managing Director regarding operating on low or no-inventory are implemented without careful consideration of the implications and/consequences. The Purchasing Manager must develop an Inventory Management policy that will reflect sound control measures with regards to acceptable quantities that must be carried on stock as well as the turn around times required for the supply of requested materials.
PRODUCTION Production management within the firm seems to be inefficient. However, failure to communicate production materials requirement reflects a lack of effective communication between the Production Manager, Marketing Manager and Purchasing Manager which is also compounded by the Production Manager’s personal view to having purchasing and distribution components, a view which seems to have contributed to problem the firm is faced with.
For effective management of production there is a need to hold inventory of critical materials at minimal level in order to ensure uninterrupted supply of production, and production forecasting must be communicated to the Purchasing Manager in order to ensure that sufficient materials are on hand for the duration of the operation. The Production Manager must establish a working relationship with other Managers and communicate in good faith with the interests of the firm at heart. . WHAT SHOULD JOAN GLASS DO? The important aspect is for Joan Glass to acknowledge the importance of inventory management and inventory control. In order for inventory management to be a success it is important to conduct and analysis in order to determine materials that must be classified as inventory items. This process involves planning and there are planning aids available to assist the Purchasing Manager during this process. According to Hugo et al. (2002) the aims and uses of the planning aids may be expressed as follows: – • To arrange, classify and interrelate the full range of stock items (the inventory) • To carry out an estimate of the real demand for different stock items • To obtain an estimate of the expected inventory requirements of the enterprise • To make an objective calculation of the quantities required, while considering inventory costs and inventory consumption
From the above it is clear that the required information for estimates must be obtained from other Managers and it is therefore necessary to develop a policy that is going to specifically address the issue of providing information to the Joan Glass. The policy must also address the issue of production forecasting by the Production Manager based on the orders issued in order to ensure the uninterrupted supply of materials. The re has to be an improvement in interaction between Managers and the policy must define the roles and responsibilities of each component and encourage co-operation. . SHOULD JOAN GLASS SUGGEST A MATERIALS MANAGEMENT ORGANIZATION? Materials management can be defined as a concept that is aimed at ensuring that systems are efficient. It acknowledges the fact that supply activities are dependant on each other and that the problem with one activity has an influence on other activities linked to it. Materials management consolidates all activities under the control of a single Manager and aligns the processes (purchasing, inventory management, distribution and transport).
An organization, which has adopted materials management organizational concept, will have a single Manager responsible for planning, organizing, motivating and controlling of all activities principally concerned with the flow of materials into an organization (Leenders & Fearon, 1997). From the above it is clear that the firm in this case will have one Manager, as opposed to four Managers the firm currently has, responsible for all activities with the exception of production if the concept is adopted.
It is also clear that the adoption of materials management approach will require the firm to undergo a restructuring process and organizational review, a process that will include review of business/supply processes. As much as materials management has its advantages it is important for the firm to conduct an analysis and research in order to determine whether such approach will reduce costs and increase profit margins as opposed to the total costs for organizational restructuring.
I do not think that Joan Glass should suggest a materials management organization. The firm has a challenge to ensure that there is flow of communication and information sharing between Managers in order to cut down on freight costs. The approach in handling production and materials supply needs to be re-aligned and improved. 5. SHOULD GLASS BUILD UP HER INVENTORY? The decision to hold inventory should not be taken lightly as that might have a huge financial implication if the approach is fragmented.
Inventory management cannot succeed if necessary controls are not in place as the costs for holding inventory might rise, shortage of space for inventory, obsolete inventory due to bulk buying. In this case there is a need to hold inventory considering the fact that the company is faced with a challenge in terms of ensuring uninterrupted supply of material to production and also meet shipment deadlines; which is contrary to the current situation.
Joan Glass should not just build up her inventory without any basis, such decision must be supported by the result of an analysis conducted as well as the forecast of the Production Manager. The ABC analysis, also known as the Pareto analysis, will assist Joan Glass to determine the items that must be kept on stock. According to Hugo et al. (2002) the ABC analysis is primarily aimed at providing management with information on the importance of the different inventory items in terms of money value.
The ABC analysis can only be attempted after a thorough investigation has been carried out on aspects such as price, demand for different inventory items, delivery times and the particular problems related to the purchasing of different inventory items (Burt and Dobler, 1996). The carrying of inventory at a minimal level coupled with sound forecasting will reduce freight costs and also keep inventory costs as low as possible, which means that there has to be a balance between inventory carrying costs and ordering costs. 6.
WHAT OTHER RECOMMENDATIONS COULD YOU MAKE TO RESOLVE THIS ISSUE? The case study shows that there is a communication breakdown between the management team and communication forms an integral part of the success of the organization. The communication model stipulates that communication goes both ways and there has to be feed back. There has to be frequent communication between marketing, purchasing and distribution departments in order to ensure that the required materials for orders do not fall short before the final production of an order.
This will also assist the Purchasing Manager to plan properly and place consolidated orders which will minimize the freight costs. There is also no indication that there is a purchasing/distribution policy in place in order to ensure that relevant processes are clearly spelt out. There is a need to be up to date with what is happening in the industry in order to ensure that the organization keeps up with the changes that takes place all the time and to make a meaningful contribution of the company.
In this regard Joan Glass has to be aware of what is going on within the firm, there has to be structured communication between Managers in order to ensure that production and supply is not hindered because of materials shortage. Implementing decisions or suggestions made by management without consideration can have reaching consequences as it is the case here with the cutting down on inventory because of the suggestion by the Managing Director.
Whenever changes have to be implemented an analysis and research needs to be conducted and justified by statistics/facts including costs that the organization will save. However, in this case no analysis was made except that Joan Glass decided to cut down on inventory without considering the impact the non-availability of inventory will have to production, distribution and marketing. Inventory management goes hand in hand with sound inventory control.
The organization can also look at having contracts for certain materials in order to ensure that materials are delivered timeously. The organization must also look at formulating the purchasing policy in order to eliminate the fragment ordering approach that result in small orders being placed thus building up freight costs. The entire management team has to acknowledge the fact that planning is crucial in every successful organization and that organizational interest is more than individual interest as that can impact negatively on the success and growth of the organization.
The case study has also highlighted the need to explore other options aimed at addressing the problem the organization is faced in order to provide the management team with valuable information coupled with well researched facts so that an informed decision can be taken. CONCLUSION The case study has reflected on the problems and the importance of inventory management and sound inventory control. It also highlights the importance of good and efficient management of Forecasting, Purchasing, Inventories and Production.
The case study has highlighted the importance of planning and communication between the management team and the consequences of poor planning. REFERENCES Van Weele, A. J. 2005. Purchasing & Supply Chain Management: Analysis, Strategy, Planning and Practice. 4th Ed. London: Thomson Learning. Hugo W. M. J. , Badenhorst-Weiss J. A. & van Rooyen D. C. 2002. Purchasing and Supply Management. 4th Ed. Pretoria, South Africa: Van Schaik Publishers. Burt D. N. , Dobler D. W. & Starling S. L. 2003. World Class Supply Management: The Key to Supply Chain Management. 7th Ed. New York: McGraw-Hill.