Consolidated Electric Case Study

1. Design an inventory control system for Consolidated Electric based on the case. Consolidated Electric is a wholesale distributor of electrical equipment and supplies. Since this is a wholesale distributor, the inventory management is an Independent demand which is influenced by the market conditions outside the company. Currently they are using a Cardex system which is outdated and is not an acceptable or cost effective way to manage inventory in today s business. In order to improve their customer relations and cost ob!ectives, I would suggest that they update to a computer system that uses an order"point method for replenishing inventory which is the philosophy used when inventory demand is independent. #he model that they should follow is the continuous review model which is based on a fixed order quantity and should follow the $%C classification system. #o determine the re"order point of an item, they should utili&e the E'( formula which will help minimi&e the sum of carrying or holding costs as wells as setup or ordering cost. 2. Write a one-to two-page paper describing how the system you have designed will help the company meet customer-service and cost ob ectives.

Consolidated Electric )CE* is a wholesale distributor of electrical equipment and supplies. Currently the company has )+* warehouses in Iowa and is the ,-th largest electrical wholesaler in the country )Schroeder, .oldstein, / 0ungtusanatham, -1,,*.
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)CE* stocks approximately -1,111 items and purchases their inventory from -11 different manufacturers. #he price of the items they purchase range from 41.1, to several hundred dollars. #he top -,111 items account for 516 of sales and the bottom ,1,111 items account for -16 of the sales leaving the remaining 7,111 items accounting for 816 of the sales. #oday they are using an 9earn and turn: concept inventory system which relates to earnings margin x inventory turn ratio ; a constant value of -.1. Every year they set a target for the ratio and a value for each product line. It was stated that their current system does not work well for individual inventory items as some items tend to be in excess supply while others are often out of stock. #o meet the customer s ob!ective, which is to maximi&e customer service and to minimi&e costs it is imperative that they update their manual system into a computeri&ed system for all inventory management. In order for the Inventory <anagement System to be effective, the following requirements would need to happen= Computeri&ed system to keep track of inventory 0eliable forecast of demand >nowledge of lead times 0easonable estimates of holding costs, ordering costs and shortage costs $ classification system

#wo of the most important issues in inventory control are order quantity and order timing. ?ith this being said, my recommendation is to utili&e an order"
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point method which would use a fixed order quantity system )( systems* which has variable time between orders and uses the E'( formula. ?ith this system, the on"hand inventory balance is what triggers an order to be submitted. Consolidated Electric should incorporate a 93erpetual Inventory System: which is as system that keeps track of removals from inventory continuously, and also monitors the current levels of each item. #he classification system that I recommended was the $%C Classification system which controls inventories by dividing items into 8 groups $, %, and C respectively. .roup $ is going to consist of the highest monetary value which should account for approximately -16 of the total inventory usage. ?ith this level of control will help with any concerns with cost benefits as .roup $ which is the highest value would be reviewed on a regular basis and .roup C which is the lowest value are not reviewed and orders are placed directly. ?ith the order"point method, the economic order quantity )E'(* formula should be used which the demand rate should be constant, recurring and known. @ead #ime should not vary, item cost is constant with no discounts, and ordering is done in lots or batches. #he E'( model minimi&es the sum of carrying or holding costs as well as the setup or ordering costs. 2eterminants of the 0eorder point are the rate of demand, the lead time, stock out risk )safety stock* and demand andAor lead time variability. If CE follows the recommended inventory control systems, they should be able to avoid stock"outs which will keep customer s happy and coming back. $lso using the E'( model and the replenishment philosophy the system should
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signal the buyer when the inventory level of an item needs to be replenished which takes into account the consumption of the item during order lead time and the quantity required for the safety stock.

Works Cited
Schroeder, 0., .oldstein, S., / 0ungtusanatham, <. )-1,,*. Operations Management Contemporary Concepts and Cases )5th ed.*. Bew Cork, Bew Cork, DS$= <c.raw" EillAIrwin.

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