Solutions to Problems Facing companies dealing with computer peripheral devices

Solutions to Problems Facing companies dealing with computer peripheral devices

The organization selected for the study deals with computer peripheral devices. The inventory needed by the manufacturer varies significantly from low-value single units to expensive complex systems with long-lead times. A logistics cost/performance benchmark for all of the divisions showed that every division within the company had very high, affecting the balance sheet and the P & L. However, there are concerns about the impact on profits of merely disposing of obsolete inventory. The company needs analysis of how disposing of stock will affect profits and a system to prevent the buildup of outdated inventory.

Major Problem Facing the Organization

The organization selected faces one major problem: How to institute a program to prevent the accumulation of obsolete inventory with minimal impact on profits thereby reducing the burden of inventory carrying costs which have been found to be extremely high?

Possible Solutions

Option A: Effective regular disposal of obsolete inventory

The organization can institute measures to dispose of off obsolete inventory to reduce costs regularly. The problem here would be ensuring the disposal does not impact profits sufficiency to offset the reduction of in carrying costs. Merely throwing out inventory is a poor decision in this regard. There are three possible effective ways to dispose of obsolete inventory with minimal impact on profits that the organization can take:

Pairing outdated products with fast selling products and offering significant discounts for the combination. This ensures some costs are recovered while encouraging and

Donating to charity improves brand image while allowing the company to take advantage of tax breaks for charitable work, thereby reducing losses.

Returning obsolete inventory to a supplier. This is only possible where the supplier has a return policy.

The fundamental disadvantage of this system is that it may be costly in the long run. It is effective and advantageous as a one-off or when obsolete inventory only very occasionally. Otherwise, it may be useful in reducing carrying costs but still result in losses due to lost inventory. It is also costly for costly inventory even when it is done as a one-off.

Option B: Leveraging purchasing power to renegotiate supply deals.

A proper renegotiation of terms with suppliers may help reduce carrying costs. One way is to try and include a return policy for obsolete inventory in exchange for new inventory. Another possible point of negotiation is on lead times. The company can push suppliers to reduce lead times significantly to reduce the need for bulk supplies and unnecessary storage due to considerable lead time. Signing long term agreements with suppliers may also help in cost reduction. Long term deals reduce surprises due to changing prices (hence reducing the need to overstock when one feels prices are low and going to rise soon) and encourages suppliers to hold stock on behalf of the business, therefore, reducing carrying costs.

Leveraging purchasing power is generally possible when the organization possesses significant purchasing power that makes it lucrative to suppliers. It becomes difficult when the organization deals with many suppliers, each providing only a small portion of the overall inventory. Suppliers may also expect the renegotiation to be based on order magnitudes; the very magnitude that results in an oversupply of inventory.

Option C: Investing in Inventory Management System

An Inventory Management System (IMS) ensures the proper management of inventory so as to reduce costs. The system can be used to establish a desirable reorder point based on actual consumer demand rather than the expectation of demand. Such a system allows the tracking of stock across all divisions and reduces the accumulation of obsolete inventory while reducing the risk of running out of in-demand inventory. The system can be designed to automatically reorder high flying inventory once a certain level is reached. The system can also be designed to indicate the point at which inventory becomes obsolete and when disposing of would be ideal for reducing unnecessary excess storage. The system hence ensures the practical usage of storage space. The main disadvantage of this option is the need for dedicated staff to manage the system and running costs.

Choice and Rationale

Option C offers the best solution for the organization selected. Since the organization manufactures inventory as well as buying from suppliers, the system can be designed to tie the manufacturing and purchasing to existing stock. A centralized system would allow the inventory in every division to be monitored effectively. The system would also allow the effective disposal of obsolete inventory. Option A is not ideal because of the high cost of some inventory which would make regular disposals too costly. Option B is also not ideal because the company has a large variety of inventory, including manufactured inventory.

Implementation

A renowned IT firm that has provided Inventory Management Systems to a wide range of businesses should be hired to create a system and train staff on how to use the system. A diverse team consisting of members from Operations, Marketing, Sales and Finance should be constituted to oversee the implementation of the system from the business end. Each department and each division should receive training on the new system. The process should take approximately three months. There is a need for a feasibility study to analyze the costs of implementing the system.