Student Instructions:

Read the Case Study: Higher Service Levels in order to answer the questions below.

Case Study: Higher Service Levels

Hopson Steel is a distributor of steel and metal products. It has sales territories in twelve states which are served from six warehouses. Each warehouse is autonomous and carries enough inventory to cover sales in two states.

To the dismay of the major stockholders, profits and sales at Hopson Steel have not changed appreciably over the last five years. The profits of competitors have increased. In an effort to institute change, Mr. Benton, the President, has replaced the companys general manager with Mr. Arnold Cohen. With considerable effort and a substantial salary offer, Mr. Cohen was persuaded to leave his position with a sporting goods firm.

Upon arrival at the firm, Mr. Cohen examined sales records and market forecasts for the steel industry. He predicted a substantial increase in demand for several products. After commenting several times that increased sales were the salvation for Hopson Steel, he issued the following directives to each of his six material managers:

1. Purchase and stock at each warehouse all items listed in the general supply catalogue.

2. Purchase large quantities of products for inventory so quantity discounts can be utilized.

3. If economically possible, purchase economic order quantities (EOQs).

4. Inventory levels will rise, but the larger holding cost will be offset by increased sales (the higher service level will increase sales).

5. All managers who exceed last years performance will receive bonuses.

Within a few months, sales increases were reported along with predictions of even greater increases by year end. The warehouses reported the largest stock of steel products in the companys history. Labor negotiations between the steel industry and labor unions were at an impasse and it appeared that a strike was imminent. Fearing a strike would deplete inventory levels when sales were increasing, Mr. Cohen urged the procurement of even larger quantities of steel from any source available.

Although a strike did occur, it lasted for only a week. At the end of the year, Mr. Benton reported a sales increase for the company but a loss on operations. He attributed the poor performance to high inventory levels and other unexpected costs. With some reservations, Mr. Benton predicted a brighter year ahead with increased sales and a return to profitability. He professed continued trust in Mr. Cohens ability.

1. Discuss the merits of each of Mr. Cohens directives to his materials managers.

2. As a stockholder, what are your opinions about the presidents comments on the future of the company? Do you foresee any major problems?

3. Do you share Mr. Bentons trust in Mr. Cohen?