During 2000, automobile parts company Mopar implemented a new inventory management system costing $1.5 million. Mopar distributed parts from 3 central and 11 regional warehouses to hundreds of parts dealers. The company filled orders for approximately 1 million line items per week from an inventory of 280,000 parts for Chrysler, Dodge, and Jeep brand vehicles.
Mopar implemented the new system to improve its management of inventory levels. The company previously maintained inventories based on forecasted demand, but often ran out of some parts and carried inventory levels that were too high for other parts. When a customer ordered a part that was out of stock at a particular warehouse, the company incurred extra costs to search for the part at other warehouses. If the part was not found, Mopar placed a rush order to have it shipped directly to the customer from one of its 3,000 suppliers. When inventory of a part was too high, valuable warehouse space was wasted and the company incurred unnecessary inventory carrying costs. To reduce these types of problems, the company had manually tracked data for 100 of the highest-cost and best-selling parts. The managers used measures such as how often a part was out of stock to adjust inventory purchases. The new inventory system included a database that would track parts at all warehouses as well as suppliers, customers, and forecast levels. The system helped managers identify $3.5 million in overstocked inventory. They expected an additional $10 million in annual savings from reduced backorders and rush orders.
SOURCE S: Mopar’s Web site at www.mopar.com and J. Xenakis, “How to Slash Inventory Costs,” CFO.com, December 13, 2000.
A. Was Mopar’s new inventory system likely to completely eliminate out-of-stock occurrences? Why or why not?
B. Discuss whether it would be beneficial for Mopar to institute a JIT inventory management system.
C. Benefits from Mopar’s new system depend on the accuracy of data in its inventory database. Identify possible reasons why the data may be inaccurate.
D. Describe possible internal controls that could prevent or detect and correct inaccuracies in Mopar’s inventory database.
E. Mopar’s managers expected to achieve $10 million in annual savings from reduced backorders and rush orders. Suppose you are asked to develop an estimate of these savings. How might you go about making the estimate? Why types of data would you use? What types of assumptions would you need to make?