The controller of a retail company has just had a $50,000 request to implement a
ID: 394560 • Letter: T
Question
The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A senior VP, in rejecting the request, noted, “Given a choice, I will always prefer a $50,000 investment in improving things a customer sees or experiences, such as our shelves or store layout. How does a customer benefit by our spending $50,000 on a supposedly better accounting system?” How would you respond to the VP? What value does ABC provide to customers, if any? What are “selling” point that should be noted about the benefits of ABC? The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A senior VP, in rejecting the request, noted, “Given a choice, I will always prefer a $50,000 investment in improving things a customer sees or experiences, such as our shelves or store layout. How does a customer benefit by our spending $50,000 on a supposedly better accounting system?” How would you respond to the VP? What value does ABC provide to customers, if any? What are “selling” point that should be noted about the benefits of ABC? The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A senior VP, in rejecting the request, noted, “Given a choice, I will always prefer a $50,000 investment in improving things a customer sees or experiences, such as our shelves or store layout. How does a customer benefit by our spending $50,000 on a supposedly better accounting system?” How would you respond to the VP? What value does ABC provide to customers, if any? What are “selling” point that should be noted about the benefits of ABC?Explanation / Answer
ABC inventory system classifies all inventory items into three categories – inventory items in the “A” classification are most heavily used, inventory items in the “C” categories are rarely used. The “B” category lies in the middle.
ABC inventory system provides immense and significant value to customers. To start with the ABC inventory system ensures that inventory accuracy levels are high. This will lead to a situation in which there is no stock out condition being faced by the customers. Secondly ABC inventory system enables long term reduction in investment in materials. The benefit of reduction in costs can be passed onto the buyers by lowering the price points to some extent. More value is added not only for the company but also for the customers when the company is able to make use of strategic pricing. The company will be able to monitor those products that are highly desirable to customers and make use of a single supplier to reduce carrying costs. This is beneficial for both the company as well as its customers in the long run. Lastly the ABC inventory system will enable the retail company to optimize its customer service levels. Service levels for different SKUs (stock keeping units) and different products depends on factors like cost of the item, quantity being sold, gross and net margin etc. By making use this inventory system a company can optimize its service levels based on the product classification.
As we can see that the benefits associated with the ABC inventory system are not immediately tangible. But as discussed above they do add significant values for the customers in the long run and will enable the company to serve its customers in an optimal manner and in a manner that will help the retail company to best serve their needs and requirements. These value adding points are significant and will outweigh the initial cost of $50,000 required for implementing the system.
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