Purchasing & Materials Management Exam III $-$ Inventory Irritation II

The ABC$$s of Inventory Management

John Quinonez had a preliminary solution to the inventory situation for his growing office supply

business called $$Office Warehouse.$$ He had done a small study on some products but needed to

complete a more comprehensive analysis soon. As before, he did not always have the cheapest prices,

but he grew his business on having virtually anything any office might need and would guarantee

delivery to any business within $50$ miles. Needless to say, the delivery costs for John were high, but

there was little he could do about that since that aspect was a significant competitive advantage for him.

Cost Cornucopia

Again what was bothering John was the increasing cost of inventory. He felt he had to keep

plenty of inventory on hand to maintain his competitive advantage, but the inventory was costing him a

large amount of money. First, some of the inventory was subject to spoilage or obsolescence. The fact

that he had to scrap some items or keep some items around too long still bothered him greatly.

Inventory Inaccuracy

The point$-$of$-$sale computer terminals John used for cash registers,$$ inventory still had to be

constantly checked. As was stated earlier, mislabeling, accidentally placing material in the wrong

location, and some inevitable shoplifting all took an agonizing toll on the inventory accuracy. In the

past, some of his employees suggested he could help the situation by handling some inventory

differently from others, but since they could not give him specifics as to how to do this, he continued to

treat all inventory the same.

Ruth$$s Revelation

Ruth had told John that he should consider using ABC inventory principles together with more

effective safety stock principles to reduce his cost while still maintaining his reputation for customer

service and delivery. Ruth$$s initial analysis looked very promising so John had given her the go ahead

to study the rest of the inventory.

Quantitative Quandary

Ruth had the $$green light$$ to change the entire system and take the entire inventory and show

him quantitatively how it might save money and still fulfill their business focus on availability. Table $1$

summarizes the inventory data she developed. Help Ruth complete an ABC inventory analysis on the

parts in Table $1.$