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 of increasing the profit by 5% and sales revenue by 20%. With $43. million spend every year on her purchases and $12 million locked up in inventory, President had stress Sally Stone, the director of supply management of EMC to explore and exploit all the available option to cut the expense in order bolster their business.
1. What actions should Sally take to reduce inventories by 10 percent? Reducing inventories by 10 percent can’t be met by focusing on any single aspect of business but need a holistic approach. There are many approaches available for reducing inventories and Sally should exploit all the opportunities.
As a director of supply management, Sally can study the portfolio of products to decide which product can be made in house and explore any opportunity to outsource any of these activities.
Outsourcing of individual part or assemblies will help EMC to reduce inventory and leverage efficiencies of warehouses and logistics. The Pareto Analysis will help to determine the important areas of inventory that are of high importance to the business and need immediate attention. A small change in inventory of higher dollar value can bring significant improvement on ROI as compared to inventory with smaller dollar value.
This approach will bring the well needed focus of Sally and her team on to high value but small quantity which can ultimately lead to ‘quick wins’ in cost down opportunities.
EMC can adopt ‘pull strategy’ and accordingly improve the forecasting which can lead to accurate planning, scheduling, manufacturing and marketing. Since acceptable level of stock is crucial, the accuracy of forecasting will further help to determine ‘economic order quantity’ thus reducing excessive 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 influence the drive to keep 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 reflects in the bottom line. 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. 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 reduced?
Purchasing materials is a very vital competitive priority for the success of any organisation. Every successful organization has realised the importance of supply management in providing high customer value proportion and making profit at the same time. EMC can achieve their goals, but definitely not with the current practises and need to challenge their all the procurement processes. EMC can negotiate with supplier to optimise the inventory purchased not just focusing on price. They should focus on the supplier’s service level in terms of quality and timely delivery.
Supplier can also be gauge by responsiveness and innovation for further enhancement of the product and services. EMC can develop a collaborative relation to educate supplier of their goals and needs. Awarding long term contract and developing supplier can help to keep the prices in check. Logistics have bigger influence on the cost of the goods purchased. Accurate material resource planning can help to consolidate logistics cost. If EMC is importing the goods, this will certainly help with the international as well as the domestic freight.
Further use of 3PL to collect and consolidate materials from different supplier can bring better saving and service. The transactional waste can be reduced by appropriate IT intervention and reengineered processes. Alternate supplier might emerge due to changing business environment, an option, worth switching over. EMC supply management can buy the support from different function to pursue their goals. Perhaps value analysis by engineering function or opportunity to buy in bulk approved by finance function can bolster savings. . What position should Sally take on the president’s plan to reduce the supply management payroll by 10 percent? EMC is in crisis and the best people that can bring them out of crisis are people who works within their supply management. Laying off any team member will bring uncertainties and insecurity among the remaining people. The much needed innovative thinking will be stopped due to low morale among the employees. The expertise needed to bring the change will be lost and this might have adverse effect than doing any good.
Therefore Sally need to convince her boss that retaining and assuring employees of the job security can help to bring more saving then laying them off. She have to explain her boss that 10% of saving on manpower equates to only $37,000, the amount insignificant as compared to potential saving these people can bring to the business. The multi-tasking of employees can bring increased efficiencies allowing Sally to let any employee voluntarily reduce their work time. The move that will suit the needs of EMC as well as that employee.
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