Module 2 - SLP2 Example
Inventory Management
NOTE: This is an example of identifying and discussing the issues of inventory. Your paper may or may not take on the same form or format depending on the business you choose and the nature of the issues you identify. I have generated this business from my experience. THIS EXAMPLE IS INCOMPLETE - IT HAS NOT USED ANY REFERENCES. You, however, should use at least three references (more is better) and citations to back-up your discussion about productivity and process improvement, as well as any information about the nature of your company that you may have obtained from the literature.
SLP2 Example, Excellent Ford, Inc. continued
Excellent Ford, Inc. maintains four different kinds of inventories. I am not including what you might call the inventory of tools, technologies, computers, racks, and fixtures, etc. I am including inventories of items for sale or for use in repairs of vehicles. These four inventories are: new auto inventories (cars and trucks), used auto inventory (cars and trucks), repair parts (excluding body parts), and auto body parts (sheet metal and trim items.)
Each of these inventories is maintained for specific purposes and each one requires space. They each have their own system for tracking and identification and their own problems and issues.
New Car Inventory
Excellent Ford maintains a rather large new car physical inventory in the neighborhood of about 55 vehicles. Usually four of these are in the showroom. The remaining vehicles are on the “new vehicle” lot, which is a 7700 square foot area, specifically designated for the new vehicles. Trucks, SUVs and vans are separate from cars. The New Car Sales Manager determines how many of each of type of model to stock. Various options, features and colors and selected based on customer preferences and pricing.
Rather than calculate inventory turns based on dollar amounts, turns can be calculated based on quantities in the case of new vehicles. Excellent Ford sells approximately 625 new vehicles per year. And they maintain about 55 new vehicles in stock. So the inventory turns is calculated as 625/55, or 11.4 turns per year. In other words, Excellent turns over its inventory nearly every month. This is quite remarkable, given that the industry average of new vehicle turns for new car dealers is between 4 and 6 turns per year. Obviously some vehicles don’t move so quickly and might take several months to sell, while the hot selling vehicles like the Focus and the Fusion, sell very quickly. Excellent’s 11.4 turns is an indication of very high inventory productivity. For this reason they must maintain a steady supply on order.
New vehicles are ordered from Ford Motor Company through the vehicle ordering system that is connected to FoMoCo. The estimated delivery date is determined and the factory invoice cost is calculated. The Sales Manager can access the system any time to get an up to date picture of order and delivery status on any vehicle on order. There is another way that Excellent Ford can get new Ford vehicles, and that is through a dealer trade. This is usually done when a customer wants a specific model with specific features that Excellent does not have in stock. They can locate a vehicle that matches the customer’s wants and then make a trade for it from the other dealership.
The average build time for a new car for stock is five to eight weeks. Customer orders are completed more quickly, three to six weeks, in order to serve the customer better. New vehicles are transported on large transport trailers pulled by 18-wheelers. Each new vehicle has its own unique vehicle identification number (VIN) that provides information about the vehicle make, engine, transmission, etc. and the serial order in which it was produced on the assembly line. The VIN is used to track the vehicle, but when it arrives at Excellent, it is given a stock number, which is also a unique number that identifies the vehicle at Excellent. The stock number system provides an easier way to identify the vehicle and keep track of the keys. Keys must be guarded and kept secure in order to keep the inventory secure.
New Vehicles need some effort to maintain, but not much. Primarily, they are prepped when they arrive, including washed and logo-ed cardboard floor mats installed. They are given a stock number, keys tagged, and then the vehicle is located on the lot. Weekly lot washing keeps them clean on the outside. If a customer has driven the car for a demo, it is inspected for cleanliness and vacuumed if necessary. If a new car is being test driven by a customer, the sales person will indicate this with his own ID tag on the keyboard and also show the car checked out on the Excellent Ford inventory records. Once a month a physical inventory is done to check each vehicle for any damage and to make sure it has not been misplaced or stolen.
When the car is sold, it is identified in the inventory records as such, and updated with the owner information for owner follow-ups in the post-sale processes.
Used Car Inventory
This inventory has some similarities but also differences from the new car inventory. Excellent maintains an inventory level of about 75 used cars. The demand for used cars is higher than new, and there are more makes, models, and years of used cars to provide to potential customers. The number of used cars sold by Excellent is about 780 per year. This equates to 10.4 turns per year. This is also much higher than industry average and is a testament to the productivity level, used car buying skills and used car prep skills at Excellent. Use car inventory is maintained on the “use car” lot which is about 9000 square feet.
Used car inventory comes from two primary sources – trade-ins and auctions. When a customer trades in a vehicle on the purchase of another one, the Used Car Manager will determine the condition of the trade-in and the potential for resale. About a third to half of trade-ins are sold for junk or sold to other used car dealers with different clientele. The other source is the auto auction. Excellent will take the used cars it does not want to the auction and also look to buy the ones it does want. There are local auctions for car dealers, and Ford Motor Company also has auctions for its Ford dealers where it sells its cars that have been used for a year by its executive managers.
Inventory records are maintained for the used cars that are bought and sold. VINs and stock numbers are assigned and maintained. All used cars that will be for sale to the public are driven and inspected very closely to determine what is necessary to bring it to retail sales condition. The used car repair facility has technicians that are familiar with a wide range of makes and models. Diagnosis and repair as well as necessary parts needed for non-Ford makes are handled by this facility. After repair, the vehicles are detailed and the interior is repaired and cleaned. Body work and painting may also be done.
Once the used car is on the lot for sale, it is maintained in the same manner as the new car inventory – washed weekly, cleaned necessary, monthly physical inventory. One exception is that a repair issue may arise with a used car. If this is the case, then it is put in the used car repair facility and repaired. Accounting for the costs of repairs is an important issue since this adds cost to the car. The Use Car Manager will determine if the price of the car needs to be adjusted.
Parts Inventory
Excellent Ford maintains a large inventory of parts for repairing customer Ford vehicles. Not all parts can be maintained by Excellent since there are thousands of different parts for the new model year, plus just as many for the previous model years. Cost of sales of parts is around $1,400,000 and Excellent maintains about $685,000 at cost. This computes to a 2.04 turns per year.
Physical inventory is maintained in the parts inventory section located next to the Service Department. Three parts technicians assist the repair technicians with identifying possible parts that are needed for a specific repair. There is a separate counter where retail customers may buy parts they need. However, the vast majority of parts are for the service business. There are five rows of parts bins that go 8 feet high. There is a movable ladder to reach the higher parts bins. These are where the less frequently needed parts are stored.
The computer system tracks parts demand and indicates their bin location in the physical system. This system also forecasts future demand. Each week the Parts Manager reviews parts demand from the system and the forecast it makes for a two month future window and then order is place directly to FoMoCo’s Parts division for the parts that are needed. The average order time is usually two to four weeks, but occasionally there are parts that become high demand items and take much longer to arrive. Excellent maintains an ABC system which categorizes parts into high dollar inventory cost (A), medium inventory cost (B), and low cost (C). The A category items are expensive on-board computer related parts, engine blocks, transmissions, wheel rims, and other major repair items. The C item parts are screws, bolts, belts, and other inexpensive items. Obviously the B items are what is not in either category such as oil filters, hoses, caps, plugs, etc. Cycle counting of A items is done every two months, B items every six months and C items every year.
The main issues with parts inventory is simply having the right part when you need it, and the amount of overhead cost that goes into maintaining the inventory and the facilities. This part of the operations is the least productive but it is also very critical to customer satisfaction. The main supplier is Ford Motor Company and of course, they in turn have their suppliers who manufacture these parts and components not only for parts inventory but also for the building of the current model year. As cars get age, it can become difficult to find the parts needed to repair it. Excellent has little control over obtaining parts for older cars other than to maintain its own inventory of older parts and to maintain a network of other dealers who have these parts for older cars as well. Eventually, it can become necessary to locate parts from a salvage yard (junk car dealer). Excellent has often considered having its own salvage yard.