Inventory Control

Harvey Industries, a Wisconsin company, specializes in the assembly of high pressures washer systems and in the sales or 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: Automobiles, Building maintenance, engines, airplanes, barns, ice cream plants, lift trucks, swimming pools, and machinery. Industrial customers include GM, Ford, Chrysler, Delta Airlines, UPS, 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 was 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 products include towels, tire cleaner, and upholstery cleaner. In the recent years Harvey Industries has been in financial difficulty. The company has lost money for 3 of the 4 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. 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 repairs and parts 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 UPS 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 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 are 973 different part numbers purchased for stock last year and those purchases amounted to 314, 673. An analysis of inventory records shows that $20,684 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 the 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.

Because of the recent death of the owner, the trust department of 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?