Final Term Paper

Recommendation on Inventory Control System – Harvey

Industries

Prepared for:
Adeyl Khan (AyN)
MGT314 Section: 2

Prepared by:
K. M. Iftezar Sayeed
073 214 530

April 20, 2010

North South University

 K. M. Iftezar Sayeed
073 214 530

HARVEY INDUSTRIES CASE STUDY.

As a consultant the first and most important recommendation for the
management would be to take inventory management seriously. Holding just
the right amount of stock at the right time will result in customer satisfaction
and lower cost eventually leading to higher profit margin. The company
(Net loss/ Total sales = -
suffers from a negative return on sales of -1.39%
$17174/1238674).

Few major changes are needed to get the company back to its feet and they
will be discussed one by one. Key Observations and recommendations are
given below:

Observation A: It is observed that the stockroom foreman, the purchasing

manager or manufacturing manager, whoever notices a stock out first,
arranges stock replenishment preparations.

Recommendation:

Harvey Industry should either follow a periodic (physical count of items in

inventories) or perpetual system (keeping track of removals from inventory
continuously, thus monitoring current levels of each item) to monitor stock
levels. This will ensure management being alert every time stocks run low.
The stockroom foreman or his assistant (or both) should be given the
responsibility to check the stock levels. It should be a core part of their job
description thereby ensuring seriousness when monitoring stock levels. If
this job is assigned to an employee(s) then it will ensure stock replenishment
before actually running out of stock.

Observation B: Current and accurate bills of materials of car wash and

industrial application assembly are available. These materials are needed to
support the assembly schedule and are known well in advance of production.

Recommendation:

The Manufacturing manager can use a basic economic order quantity

model (EOQ) to figure out the optimal order quantity. Current inventory
cost for Harvey Industries stands at $124,324. Management can figure out
demand per year and can calculate EOQ to minimize holding cost and
ordering cost. Management, after calculating EOQ can also predetermine a
 K. M. Iftezar Sayeed
073 214 530

Reorder point – a minimum quantity of stocks – thereby ensuring steady

supplies so that assembly line and production facilities does not remain idle.
It can also avoid bottleneck situations.

Observation C: Parts stored in the stock room are arranged according to

each vendor. Customer orders are handled by either the storeroom foreman
or his assistant and many customers stop by and order the parts and
supplies as they need. Most of the items are stocked by either the
manufacturer or by a wholesaler and stock replenishment usually takes 2 to
3 days.

Recommendation:

Stockroom layout can be arranged according to each sector (industrial

application, car wash) instead of according to vendors. Management should
monitor inventory needs of each sector and restock accordingly .This will
ensure smooth production for each sector in Harvey Industries. Management
can also appoint a customer representative to deal with orders this will
relieve the extra effort on the stock foreman and his assistant enabling them
to concentrate more on key responsibilities. If products have UPC (universal
product code) then management can take advantage of computerized
system which will automatically show stock levels and put on some alert
every time stock reaches a predetermined minimum. Management should
also acknowledge the lead time (2 to 3 days) and make sure it has just
enough stock to last until new orders are received.

Observation D: The assembly area runs out of low value item such as nuts,
bolts, screws, and washers etc. This causes a significant amount of downtime
for the assembly lines. 973 different parts were purchased for $314,673 and
179 items for $220,684.

Recommendation:

Harvey Industries can make use of the A-B-C approach which classifies
inventory items according to some measure of importance. It can assign C to
low value items such as nuts and bolts (the 973 items costing $314,673) and
A to high value parts (179 items costing $220,684) which are needed on a
low volume but have higher per unit costs. A-B-C approach will ensure that
the company puts more control on high end parts and just enough control to
 K. M. Iftezar Sayeed
073 214 530

make sure that low value parts doesn’t run low to disrupt the production. It
can minimize orders per year with EOQ and thereby reduce holding costs of
inventories.