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 Currently they are using a Cardex system which is outdated and is not an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.

To improve their customer relations and cost objectives, 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. The

model that they should follow is the continuous review model which is based on a fixed

order quantity and should follow the ABC classification system. To determine the re-

order point of an item, they should utilize the EOQ formula which will help minimize 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 objectives.

Consolidated Electric (CE) is a wholesale distributor of electrical equipment and

supplies. Currently the company has (4) warehouses in Iowa and is the 12 th largest

electrical wholesaler in the country (Schroeder, Goldstein, & Rungtusanatham, 2011).

(CE) stocks approximately 20,000 items and purchases their inventory from 200

different manufacturers. The price of the items they purchase range from $0.01 to

several hundred dollars. The top 2,000 items account for 50% of sales and the bottom
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10,000 items account for 20% of the sales leaving the remaining 8,000 items accounting

for 30% of the sales. Today they are using an “earn and turn” concept inventory system

which relates to earnings margin x inventory turn ratio = a constant value of 2.0. 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.

To meet the customer’s objective, which is to maximize customer service and to

minimize costs it is imperative that they update their manual system into a

computerized system for all inventory management. For the Inventory Management

System to be effective, the following requirements would need to happen:

 Computerized system to keep track of inventory

 Reliable forecast of demand

 Knowledge of lead times

 Reasonable estimates of holding costs, ordering costs and shortage costs

 A classification system

Two of the most important issues in inventory control are order quantity and

order timing. My recommendation is to utilize an order-point method which would use

a fixed order quantity system (Q systems) which has variable time between orders and

uses the EOQ formula. With this system, the on-hand inventory balance is what triggers

an order to be submitted.

Consolidated Electric should incorporate a “Perpetual Inventory System” which is

as system that keeps track of removals from inventory continuously, and monitors the

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current levels of each item. The classification system that I recommended was the ABC

Classification system which controls inventories by dividing items into 3 groups A, B, and

C respectively. Group A is going to consist of the highest monetary value which should

account for approximately 20% of the total inventory usage. With this level of control

will help with any concerns with cost benefits as Group A which is the highest value

would be reviewed on a regular basis and Group C which is the lowest value are not

reviewed and orders are placed directly.

With the order-point method, the economic order quantity (EOQ) formula

should be used which the demand rate should be constant, recurring and known. Lead

Time should not vary, item cost is constant with no discounts, and ordering is done in

lots or batches. The EOQ model minimizes the sum of carrying or holding costs as well

as the setup or ordering costs. Determinants of the Reorder point are the rate of

demand, the lead time, stock out risk (safety stock) and demand and/or 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. Also, using the

EOQ model and the replenishment philosophy the system should signal the buyer when

the inventory level of an item needs to be replenished which, considers the

consumption of the item during order lead time and the quantity required for the safety

stock.

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 Works Cited
Schroeder, R., Goldstein, S., & Rungtusanatham, M. (2013). Operations Management Contemporary
Concepts and Cases (6th ed.).

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