Eagle Machine Company (EMC), an organisation with sales totalling $72 million and engaged in manufacturing speciality restaurant equipment is in crisis due to decline in sales and increased costs. The president of the EMC had called up a meeting with his managers to explain the sense of urgency and clearly mentioned the goals for coming year of increasing the profit by 5% and sales revenue by 20%. With $43.2 million spend every year on her purchases and $12 million locked up in inventory, President had specially emphasised Sally Stone, the director of supply management of EMC to explore and exploit all the available option to cut the expense without harming the business.
1. What actions ...view middle of the document...
Since acceptable level stock is crucial, the accuracy of forecasting will further help to determine Economic order quantity thus reducing excess safety stock. In modern supply chain this concept is very commonly used and proven as a success.
The collaboration with the supplier can bring fresh ideas or any economical alternatives. Sally can work with them to reduce the lead time which will provide the leverage by driving the cost down. Communication is the key for the success of supplier as well as customer. Therefore Sally should communicate their organisational goal with her supplier and formally look to build relationship in terms of partnerships, longer term contracts, service level agreements etc.
Sally can review the existing stock for obsolesce and sell it to potential buyer thus freeing up the locked fund. Every dollar saved or released from obsolete inventory sits at the bottom line in accounting books. Idea of stock take can also help Sally determining the key areas of concern, improvements and opportunities.
Alternate materials or standard parts instead of custom made parts can result in big savings. Sally should also look at benchmarking the supplier price comparing with the Global market, commodity pricing, world trends, sourcing from Low cost Economies like India, China etc. this approach will help Sally to look at Globally competitive Supply Management and will help her with Inventory optimization.
By adopting manufacturing postponement, EMC can build the stock in semi-finished condition and leave the final assembly until they receive the order. This can be used with the similar or common sub-assemblies used in various parts of manufacturing.
The effective implementation of above mentioned technique can reduce EMC inventories by more than targeted 10 percent.
2. What dangers, if any, are there in reducing inventories?
Inventory is an inevitable consequence of trading in products. It can be in form of raw materials, work in progress, finished product or product in transit. Inventory can be seen as reserve that enables demand to be consistently met. The dangers of reducing inventory can lead EMC to following consequences:
* Stock out
* Loss of potential sale
* Customer dissatisfaction
* Downtime of equipment
* Ruin the reputation/loss of goodwill
* Loss of Supply Management reputation by not supplying in time
* Increase cost of expediting such as expensive transportation, dedicated staff etc.
The increase in certainty in supply and demand can optimise inventory.
3. In what ways could the cost of goods purchased be...