Harvey Industries Read the case and help the new president make inventory decisi

Question

Harvey Industries

Read the case and help the new president make inventory decisions for the company.

Harvey Industries, a Wisconsin company, specializes in the assembly of high-pressure washer systems and in the sale of repair parts for these systems. The products range from small portable high-pressure washers to large industrial installations for snow removal from vehicles stored outdoors during the winter months.Typical uses for high-pressure water cleaning include: Airplanes, Automobiles, Barns, Building maintenance, Engines, Ice cream plants, Lift trucks, Machinery, and Swimming pools.

Industrial customers include General Motors, Ford, Chrysler, Delta Airlines, United Parcel Service, and Shell Oil Company.

Although the industrial applications are a significant part of its sales, Harvey Industries is primarily an assembler of equipment for coin operated self-service car wash systems.The typical car wash is of concrete block construction with an equipment room in the center, flanked on either side by a number of bays. The cars are driven into the bays where the owner can wash and wax the car, utilizing high-pressure hot water and liquid wax. A dollar bill changer is available to provide change for the use of the equipment and the purchase of various products from dispensers. The prod ucts include towels, tire cleaner, and upholstery cleaner.

In recent years, Harvey Industries has been in financial difficulty. The company has lost money for three of the last four years, with the last year’s loss being $17,174 on sales of $1,238,674. Inventory levels have been steadily increasing to their present levels of $124,324.

The company employs 23 people with the management team consisting of the following key employees: president, sales manager, manufacturing manager, controller, and purchasing manager. In addition, the assembly foreman, stockroom foreman and quality engineer report to the manufacturing manager.

Current Inventory Control System

The current inventory control “system” consists of orders for stock replenishment being made by the stockroom foreman, the purchasing manager, or the manufacturing manager whenever one of them notices that the inventory is low. An order for replenishment of inventory is also placed whenever someone (either a customer or an employee in the assembly area) wants an item and it is not in stock.

Some inventory is needed for the assembly of the high-pressure equipment for the car wash and industrial applications. There are current and accurate bills of material for these assemblies. The material needs to support the assembly schedule are generally known well in advance of the build schedule.

The majority of inventory transactions are for repair parts and for supplies used by the car washes, such as paper towels, detergent, and wax concentrate. Because of the constant and rugged use of the car wash equipment, there is a steady demand for the various repair parts.

The stockroom is well organized, with parts stored in locations according to each vendor. The number of vendors is relatively limited, with each vendor generally supplying many different parts. For example, the repair parts from Allen Bradley, a manufacturer of electrical motors, are stocked in the same location. These repair parts will be used to provide service for the many electrical motors that are part of the high-pressure pump and motor assembly used by all of the car washes.

Because of the heavy sales volume of repair parts, there are generally two employees working in the stockroom—a stockroom foreman who reports to the manufacturing manager and an assistant to the foreman. One of these two employees will handle customer orders. Many customers stop by and order the parts and supplies they need. Telephone orders are also received and are shipped by United Parcel Service the same day.

The assembly area has some inventory stored on the shop floor. This inventory consists of low-value items that are used every day, such as nuts, bolts, screws, and washers. These purchased items do not amount to very much dollar volume throughout the year. Unfortunately, oftentimes the assembly area is out of one of these basic items and this causes a significant amount of downtime for the assembly lines.

Paperwork is kept to a minimum. A sales slip listing the part numbers and quantities sold to a customer is generally made out for each sale. If the assembly department needs items that are not stocked on the assembly floor, someone from that department will enter the stockroom and withdraw the necessary material. There is no paperwork made out for the items needed on the assembly floor.

There were 973 different part numbers purchased for stock last year and those purchases amounted to $314,673. An analysis of inventory records shows that $220,684 was spent on just 179 of the part numbers. Fortunately for Harvey Industries, most of the items they purchase are stocked by either the manufacturer or by a wholesaler. When it is discovered that the company is out of stock on an item, it generally takes only two or three days to replenish the stock.

Due to the company’s recent losses, its auditing firm became concerned about the company’s ability to continue in business. Recently the company sold off excess vacant land adjoining its manufacturing facility to generate cash to meet its financial obligations.

New president

Because of the recent death of the owner, the trust department of a Milwaukee bank (as trustee for the state) has taken over the company’s affairs and has appointed a new company president. The new president has identified many problem areas—one of which is improper inventory control. He has retained you as a consultant to make specific recommendations concerning a revised inventory control system. What are your recommendations and their rationale?

1.

For the 179 parts that account for approximately 70% of dollars spent last year on stock, what inventory accuracy would APICS recommend?

select

select

Plus/minus 0.2%

Plus/minus 1%

Plus/minus 5%

selectPlus/minus 0.2%Plus/minus 1%Plus/minus 5%2.

The assembly area often has downtime due to stockouts of basic items such as nuts, bolts, screws, and washers. What do you recommend?

select

select

Have all workers go to the main stock room to replenish parts whenever they feel they need more

Tell the workers to use less screws and washers when parts are running low

Have the stockroom assistant fill up the bins in the assembly area each morning

selectHave all workers go to the main stock room to replenish parts whenever they feel they need moreTell the workers to use less screws and washers when parts are running lowHave the stockroom assistant fill up the bins in the assembly area each morning3.

Replenishments are currently made when someone notices parts are "low"; what should "low" be?

select

select

Low should be anything below a full container of parts to minimize stockout risk

Low should be enough stock to maintain the desired order cycle service level

Low should be set to zero to minimize space requirements

selectLow should be anything below a full container of parts to minimize stockout riskLow should be enough stock to maintain the desired order cycle service levelLow should be set to zero to minimize space requirements4.

How would you recommend reducing shortages?

select

select

Have the new president order all materials once each week based on customer orders

Use a two-bin system for repair parts and supplies, plus order material required by the build schedule

Reduce inventories to reduce shortages

selectHave the new president order all materials once each week based on customer ordersUse a two-bin system for repair parts and supplies, plus order material required by the build scheduleReduce inventories to reduce shortages5.

What is one possible explanation for the steadily increasing inventory levels?

select

select

The company had to purchase inventory to make use of the cash generated by the sale of their excess land.

High-pressure washer systems are being built to meet a forecast that is higher than actual demand.

Sales of repair parts and supplies have unexpectedly increased this past year.

selectThe company had to purchase inventory to make use of the cash generated by the sale of their excess land.High-pressure washer systems are being built to meet a forecast that is higher than actual demand.Sales of repair parts and supplies have unexpectedly increased this past year.6.

What level of safety stock should the company target for repair parts?

select

select

No safety stock, because that indicates poor planning

As high of a level as required to satisfy customer service contracts

The same level as "C" item components

selectNo safety stock, because that indicates poor planningAs high of a level as required to satisfy customer service contractsThe same level as "C" item components7.

Office supplies come from one supplier with deliveries once per week. Which type of inventory model should be used to help decide how much to order?

select

select

Single-Period Model

Fixed-Order-Interval Model

Economic Order Quantity Models

selectSingle-Period ModelFixed-Order-Interval ModelEconomic Order Quantity Models

Explanation / Answer

1.

For the 179 parts that account for approximately 70% of dollars spent last year on stock, what inventory accuracy would APICS recommend?

Answer: plus/minus 0.2

2. The assembly area often has downtime due to stockouts of basic items such as nuts, bolts, screws, and washers. What do you recommend?

According to ABC analysis these basic items can be classified as C-class, which are having very low % dollar volume but high % consumption.

Option a: will increase load on the stockroom personal

Option b: reducing the usage will reduce the output rate of final assembly

Option c: By analyzing the usage rate of c-class item, apply two-bin system and replenish the bins every morning by stock room assitant. This will also help to monitor the inventory by stock room assistant so has to order a stock when it is reached to desired low level.

Correct Option: Have the stockroom assistant fill up the bins in the assembly area each morning

3. Replenishments are currently made when someone notices parts are "low"; what should "low" be?

The lead time to fulfill order by the vendors is estimated to be 2-3 days, thus the minimum inventory after placing order should satisfy the demand during lead time to 2-3 days. Thus, minimum inventory held should ensure desired order cycle service level.

Correct Option:

Low should be enough stock to maintain the desired order cycle service level

4. How would you recommend reducing shortages?     

As recently the demand of repair parts and supplies has been increased, use two-bin system for this inventory. If the inventory of first bin is reduced to minimum or zero level, then place order for replenishment. Till order receives inventory form second bin will be utilized. This will reduce the stockouts and improve the monitoring system. For the inventory required for assembly order the quantity that is required according to build schedule.

Correct Option: Use a two-bin system for repair parts and supplies, plus order material required by the build schedule

5. What is one possible explanation for the steadily increasing inventory levels?

The majority of inventory transactions are for repair parts and for supplies used by the car washes, such as paper towels, detergent, and wax concentrate. Because of the constant and rugged use of the car wash equipment, there is a steady demand for the various repair parts.

Correct option: Sales of repair parts and supplies have unexpectedly increased this past year.

6. What level of safety stock should the company target for repair parts?

Repair parts are major parts of the car washing machine, if not available with customer may delay or shut-down there operation. Thus, it is important to keep safety stock level that requires satisfying customer service level.

Correct Option: As high of a level as required to satisfy customer service contracts

7 Office supplies come from one supplier with deliveries once per week. Which type of inventory model should be used to help decide how much to order?

As all the supplies are ordered from single supplier and the delivery is once a week, it appropriate to apply fixed-order-interval inventory model. This will reduce the shipping cost by repeating order from same supplier. Also the inventory is monitored once a week which reduce human efforts for managing inventory.

Correct Option: Fixed-Order-Interval Model

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