DANKERS FURNITURE LTD: PURCHASING AND INVENTORY MANAGEMENT

Date: Group: Sophie Molloy, Damian Moloney,

Harriet Meagher, Cara Bruder, Miriam Nagle, Ceithreann Murray, Mark McShane, Niall Quinn, Jenni Molloy
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Table of Contents:

Dankers Furniture Ltd, an Overview

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Description of Main Issues Raised in Case

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Analysis of Current Approach Adopted by Dankers

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Recommendations for Dankers Furniture Ltd Moving Forward

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Introduction to Ops & SCM Report

Dankers Furniture Ltd, an Overview: Dankers Furniture Ltd is an Irish furniture manufacturing company. The company, since its foundation, has specialised in the production of high quality, high cost, and custom-made kitchen furniture. In more recent times, however, the company has moved into the area of mass production, more specifically the production of their Standard Line of cabinetry. The aim of this venture was to gain a market share in what the company perceived to be an expanding market for cheaper, less customised kitchen furniture. The companys directors believed that the booming Irish property market would mean that many developers would want a product which effectively enabled them to Kit Out all of the kitchens in the houses that they were building in a similar fashion. Issues Raised in the Present Case: In the present case Dankers Furniture Ltd are reviewing operations performance in light of increasing sales volumes in the Standard Cabinetry Line and thus the consequent necessity to review operations capacity. There is an overall need to be more cost effective in the areas of inventory and purchasing management. They also need to assess the capabilities of their suppliers to meet their needs in respect of delivery scheduling, as the companys Cabinetry Sales manager has always stressed that the main competitive areas in which the company wishes to gain an advantage are in respect of cost and delivery. Peter Connery has been appointed to the position of Purchasing Manager with a mandate for: The reduction of the overall cost of purchased materials. The reduction of the raw materials (purchased) inventory levels; The improvement of the delivery speed and reliability of purchased materials; The improvement of the quality performance of suppliers.

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However, Peter has received no formal training in how properly to address the task of Purchasing Management and while this was not initially an issue, it now affects the company as Peter has no conceptual grasp of how to appropriately negotiate with suppliers on issues regarding quality, price etc. These issues will be addressed in full throughout the report.

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A description of the main issues raised in the case from the point of view of Operations and Supply Chain Management: When Dankers ventured into the standard cabinetry line it found itself in a price-competitive market with several strong competitors, this was in stark contrast to the market from which it had originated. For Dankers to maintain their competitive edge in the market area, we were required to look at the key issues surrounding both their purchasing and management processes and we were instructed to devise a management plan to ensure these issues were sufficiently addressed with both cost efficiency and quality maintenance as the main factors to be incorporated into and remain central to the operations of the furniture company. Firstly, there was an issue surrounding Dankers suppliers. Dankers had no specific suppliers with whom they dealt with and so their reliability could not have been accurately measured. Within all business environments, there should be a degree of trust and confidence between parties within all relevant supply chains and a certain level of quality expected by the downstream recipient, but without a strong relationship with a consistent supplier these standards were almost impossible to attain by Dankers. If Dankers cannot rely on its suppliers, it cannot be confident in the production of its products. Secondly, Dankers pricing strategy was inefficient; it needed to be converted from passive buying into an active and aggressive buying process. At the beginning, the company didnt negotiate prices with its suppliers. They simply chose the products from various catalogues and paid the price quoted within the particular catalogues being used. Thirdly, Dankers ordering process was neither substantial nor concrete in its operation. Orders were made on a needs basis. This creates cost demands on the company including potential extra transport costs of the suppliers goods, and exposed them to avoidable risks such as stock outs and incapability to meet customer demands. Fourthly, Dankers appeared to have had a relatively high level of raw material stock on site. This was mainly composed of safety stock which had
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been used by the firm as a protective measure in the event of various quality issues, delivery failures etc. emerging during the firms operational procedures. Although this inventory technique is a useful one to have in place, placing huge dependency on it can expose the firm to various risks, all of which are generally of a monetary nature, these include high holding costs, including insurance costs, and costs incurred through storage requirements. With a large supply maintained by Dankers, it was therefore incurring costs which could be easily avoided should they have designed and implemented a management plan.

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An analysis of the effectiveness of the approach adopted by Dankers Ltd: One of the main reasons Peter was appointed as Purchasing Manager, was to devise a purchasing approach which would put Dankers in a more cost competitive position. However, it isnt clear if he has managed to do this and there are aspects of the approach taken which could be greatly improved. Peter typically uses the catalogue price or the quoted price when ordering from suppliers. While this is acceptable, it would surely be more cost effective to try and negotiate better deals, particularly when ordering large quantities of standard components and materials. Suppliers might be prepared to come down from their catalogue price if they were interested in a long-term relationship with Dankers. You would have to question the number of suppliers (164) that Dankers has. Perhaps their purchasing would be more effective if they were buying larger quantities from a smaller number of suppliers, this could lead to better deals and lower transportation costs. It is strange that Peter isnt more concerned about transportation costs as we feel that any areas in the purchasing process where costs can be reduced should be examined and dealt with accordingly. Dankers have a reputation for good quality products in their craft line and this should be maintained in their Standard Cabinetry line. While lowering costs is a primary goal for Peter, this shouldnt result in sacrificing quality. Suppliers that guarantee good quality raw materials at a reasonable price are the ones that should be kept. It does not seem like a financially viable or sustainable plan to rely on a supplier to respond quickly with a replacement component when Dankers are in need and this is one of the main issues within production that needs to be addressed.

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Recommendations on how the issues could be addressed more effectively based on the theory and principles related to the Operations and Supply Chain Management topic the case is linked with: The aim of the project was to: - Reduce the overall cost of purchased material - Reduce the raw materials inventory levels - Improve the delivery speed & reliability of purchased materials - Improve the quality performance of suppliers As is witnessed in the Dankers Furniture Ltd case we have been assigned, the problems they face are in relation to their purchasing and inventory management. To combat the issues arising from Dankers uncertain ordering operations we would recommend that Peter introduce a competitive bidding system. At present Dankers are dealing with a staggering 164 suppliers and introducing this competitive pricing system will enable Dankers to focus on a small network of reliable suppliers, allowing Peter to negotiate on price and benefit from discounted prices through bulk buying. Through this system Peter will reduce overall costs. With an increase in both sales demands and level of competition in the market place, it is critical that Dankers implements the most efficient ordering system so as to ensure no unnecessary delays occur which may delay delivery to customers and damage both their reputation and valuable consumer relationships. Looking at the ordering process that is currently in place we can see problems immediately. Peter currently orders on a needs basis. We would advise that Peter consider implementing a new electronic based ordering/purchasing system whereby standard orders are simply made by the click of a button at a specific time be it weekly, monthly etc. It is advisable that Dankers have a system in place which allows once off orders to be placed so as ensuring changing needs are met as Dankers Standard Line production is a relatively new venture and so production demands are uncertain. This would reduce lead times, promote better coordination within the organisations operations and ultimately reduce costs and time wastage. Receipt and inspection of goods needs improving too. Here we recommend that a procedure be implemented where goods are inspected upon arrival. This inspection would ensure that Dankers quality standards are met every time putting pressure on suppliers to deliver top quality
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goods always. This will ensure that we only deal with the most reliable suppliers putting an end to the time wastage and cost associated with poor standards. The returning of faulty or substandard goods is a waste of money and precious time that Peter cannot afford to have. Improvements in expediting will lead to more cost effective approaches and specific delivery times. We suggest that Peter appoint a worker to oversee the status of incoming orders. To ensure that records and maintenance is efficient and cost effective we would advise that Peter appoint an employee of Dankers Furniture Ltd to keep detailed records of the critical events within the purchasing process, ensuring that Dankers are getting full value for their money and mitigating waste in minor issues. The data obtained from these records will also allow Peter to analyse and examine each individual suppliers performance. One of the major problems that needs to be addressed within Dankers Furniture Ltd is their holding costs. Holding cost is money spent to keep and maintain a stock of goods in storage. It is largely recognised that a healthy holding stock figure is between 25% and 33.33% of material costs. Peter has holding costs of 21% which is just touching on a fifth of Dankers materials cost. We could take this to mean that Peter therefore does not have enough inventory to meet the growing demands of the Standard Line, however, it is more realistic to consider that adequate finance is not being deployed to this area resulting in remaining stock being spoiled and unusable. This is extremely inefficient and results in capital wastage. Danker Furniture Ltd has an abundance of safety stock as it states that if any quality issues arose during production, another one was available from stock and that carrying safety stock to protect against problems was the most convenient approach adopted. As Dankers Ltd. dealing with the Standard Line is a relatively new venture it is understandable that they would want to carry safety stock to mitigate the risk of stockouts (shortfalls in raw materials or packaging) as there would be, as with any new venture, uncertainties in supply and demand however it is simply not commercially viable. The introduction of the smoothing inventory approach is a recommendation. Dankers ought to determine the most efficient quantity of standard cabinets to produce a day. This will build up finished stock in periods of low demand and this stock will be reduced in times of high demand. This method is very cost effective and still allows for the availability of demand in Dankers Ltd.

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To deal effectively with these issues we would advise Peter to firstly implement a material requirements planning (MRP) worksheet so Dankers can judge how much they need to produce to meet their forecasted sales demand without relying on safety stock. Only with approximate product demand forecast can they maintain a healthy and viable volume of safety stock. Peter also needs to address the issue of inventory costs head on by studying his inventory levels and putting in place a more efficient inventory level review management programme. In particular we would recommend that Peter implements a continuous or perpetual inventory system. This is a system whereby information on inventory quality and availability is updated on a continuous basis as a function of doing business. Continuous review systems are more costly compared to periodic review systems however, it allows for closer management of inventory levels and as Dankers is an inventory intensive business they need to manage their inventory levels versus their sales carefully. This in turn will prevent a build-up of inventory that is not selling that can be costly to the business (opportunity cost-can the money be invested elsewhere?) This system has several key features most notably that inventory levels are monitored constantly and a replenishment order (based on the trade-off between holding costs and ordering costs) is issued only when a pre-established reorder point has been reached, ensuring that Dankers do not run out of stock. This notion is a replenishment order is hugely significant for Dankers as a key issue facing Dankers is to reduce the raw materials (purchased) inventory levels. It is important to note that by reducing the order quantity holding costs will decrease but the organisation will be forced to order more frequently. Conversely, increasing the order quantity will reduced the number of times an order must be placed but will result in higher average inventory levels. To combat this problem it is suggested that Dankers calculate the economic order quantity (EOQ) to determine the particular order quantity that minimises holding costs and ordering costs for an item. This can be equated by: EOQ = 2CoD/CH

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The EOQ is a good starting point for understanding the impact of order quantities on inventory-related costs however; the EOQ doesnt suggest when managers should reorder. Therefore a better solution is needed- one that takes into account the variability in demand rate and lead-time. This can be achieved by adding safety stock to the reorder point thereby protecting it against variability in both demand and lead-time. Safety stock raises the reorder point, forcing a company to reorder earlier than usual. In doing so, it helps to ensure that future orders will arrive before the existing inventory runs out. The amount of safety stock needed will be affected by the variability of demand and lead-time, the length of the average lead-time, and the desired service level. The more the demand level and the lead-time vary will force a company to hold more stock. Furthermore, a longer average lead-time exposes a firm to this variability for a longer period. Dankers, therefore, must implement a system whereby lead time is reduced and which will subsequently decrease the amount of safety stock affording the company increased capital and space and we suggest that this continuous inventory system will cater to this problem. We are confident that if Dankers Furniture Ltd incorporate the above advice in their purchasing and inventory management moving forward they will be met with positive results, most notably, a reduction in their overall holding costs and a reduction in their purchasing inventory levels.

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