Growing Pains at Grandiose Motors Essay
Grandiose Motors is a company that had dealerships in various areas selling a particular make of a car. The company has recently acquired a new dealership which does not sell only one type of model but selling multiple makes of cars at the same location hence it was a great venture for the company. In 15 years time, the company had established itself as a successful dealership and it attributes it success to three factors which it feels are its three competitive advantages; the superior after sales service of the company, known to provide genuine replacements to spare parts and also providing superior solutions to problems involving repairs.
The company claims to identify the right problem at the right time and provide the right solution to it. This is basically due to the use of new devices that can detect repairs instantly and also the well trained employees. Secondly the company uses a new approach to selling cars. The price of each automobile is listed on it so that the customers do not have to bear with the continuous personal selling of the salesman. For this the company focuses on listing the least possible price of automobiles.
Lastly the company sees its
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With the acquisition of the new dealership, Grandiose Motors too was in an expansion phase and lack of proper implementation of update policies may prove to be a risk or the company as in the case of other. This may be caused due to lack of availability of the service parts and hence the company would not be able to fulfil its promise of being able to give the after sales service. The company would lose on one of its competitive advantages. This is the reason why an efficiently planned inventory management system was required for Grandiose Motors.
Inventory system of Grandiose Motors The current inventory system can be identified with the following concerns; the inventory purchase department has to keep track of a lot of different types and categories of inventory. It was either purchased from a genuine whole seller in case of spare parts or in case of other types of products like lubricants are purchased from a number of suppliers which means a proper inventory management system is needed which keeps a record of the items bought from where and from whom.
The use of these spare parts is also categorized in two aspects; either the inventory purchased is sold over the counter to customers as in the case of accessories and spare parts or inventory purchased is to be used for the repair of a car. This suggests that the company requires an extensive record of inventory purchased, managed and sold. Inventory management is a costly procedure for any company especially those that deal in a variety of items. Some items are those that are sold the most, are highly priced and more complex while there are those items which do not contribute towards a greater sales volume (Wild, T 2002).
In the case under study, the genuine parts are the most important ones as they have a greater sales volume and are on the list of the high cost inventory while items such as lubricants are those that are referred to as the low value items. According to Pareto analysis of inventory management, the high cost items in the inventory need to be monitored closely to ensure that the company does not incur excessive outlay on those items while other low value items do not require too much effort (ibid).
Hence the company needs to classify its inventory into categories of high and low value and then further implement inventory control systems on both. Greater consideration should be given to those that are high priced and whose turnover is generally high. According to Pareto analysis it is also important to analyze the sales volume of items before classifying them into a category for an item may be of high value due to low sales, people are simply not buying it and it may be wrongly classified into the former category (ibid).
Another method which can be used for inventory classification is the VED analysis which is an acronym for valued, essential and desirable inventory and is usually used for spare parts. The vital parts are important for the company without which sales volume may be affected and hence availability of these items is a must (Bose, D 2006). More careful planning must be incorporated for those items which are classified as vital example spare parts needed for repair of automobiles would be vital for the company under study and lubricants would be desirable.
The purchase pattern for the high value goods should be different in such a way that better demand forecasts are made and due to the high cost that these items incur, the company has to ensure that excess of inventory is not bought, while other non significant items may have a different pattern. This will be explained in detail in the next paragraphs. Inventory management policy Every firm has its own inventory management policy which defines the methods of inventory acquisition by the company and also the process through which planning inventory levels and acquisition methods are decided upon.
There are three ways of defining inventory management policies (Bowersox 2000): 1. The first is the reactive approach where by inventory is purchased upon customer demand as and when required. An increase in demand would mean that the company would buy more of the inventory however; this usually depends on the kind of product the organization is selling. It must be easy to manufacture. A JIT (Just in time) inventory system is an example of such an approach. 2. The second approach is one where inventory levels are decided upon based on planning
3. and forecasting. The company forecasts demand for raw materials, spare parts or semi finished goods based on previous year results and hence inventory is ordered for and stored. This is an example of approach which is currently being used by the company under study. 4. A third is the hybrid approach which is a combination of both the methodologies mentioned above (ibid). Grandiose Motors currently uses approach number two that is planning and forecasting and it does not focus on the level dictated by customer demand.
Once the approach of inventory management is selected, Inventory control procedures should be defined. This is the methodology used to devise an inventory monitoring system which will then help the managers in deciding the quantity of inventory order to be placed and which type of inventory is required and control procedures can be further classified into two types; perpetual review, periodic review (Bowersox 2000). Of the two the company should use a periodic review with weekly or monthly inventory checks.
Such reviews are more suitable for companies that have large inventory storage at the end of the review period (ibid). Forecasting system design One of the key factors of success for the dealership was the fact that they gave superior after sales service to their customers, identifying the fault at the right time. With the availability of the right part the dealership was able to solve the repair issues for its customers. This meant that the right parts, the accessories or the spares must be available at the right time. As mentioned above the company uses forecasting technique for ordering inventory.
Purchases are based on forecasts derived from historical demand data, which accounted for factors such as seasonality. Items like automobile batteries and alternators have a greater failure chance hence they are more in demand. Whereas items such as coolants were more in demand during spring when they were needed for air conditioners. Air conditioners have a higher demand in summers as compared to winters. Forecasts are also adjusted for special vehicle sales and service promotions, which increased the need for materials used to prepare new cars and service other cars.
The company must develop a formal system of forecasting since most of the work is being done on this basis. All four dealership have their own purchase system and purchases are made on the basis of the forecasted demand for different products at each dealership. The company inventory control department must be efficient in developing this system. Forecasting may be done in three stages: • A mid range forecast for different classes of products on a monthly or quarterly basis depending on the size of the business and seasonal change in product demand (Toomey, J 2003)
• A short range fore cast based on quantitative analysis which should be done for those products that have a complete seasonal demand (Toomey, J 2003). In the company under study, air conditioners for automobiles for instance have a seasonal demand and hence a short range forecast should be conducted for them during the summer season in particular with weekly forecasts being done extended to a whole year period. While other items such as fan belts may be required at any time of the year hence a mid range forecasting technique may be used for them.
This suggests that the overall approach of the company should be hybrid that is a mixture of seasonal forecasting and also inventory ordering based on customer needs and demands. This would incorporate the JIT system which would be explained in the latter part of the report. The inventory classification mentioned above into high and low value goods will also be useful in this aspect. The low value goods may be purchased based on the level of usage by the customers while other high value goods may be purchased based on the forecasting methodology described in the former lines.