Organizational Purchasing Inventory Situation

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Business Finance

ORGANIZATIONAL PURCHASING

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Read and analyze the case and answer these questions: 1. What specific actions should the company take in the area of inventory management? Support your recommendations with a well-reasoned argument. (33 points) 2. What impact will the 20 percent increase in production requirements likely have on the company's inventory? (33 points) 3. How could AWP benefit from the establishment of an inventory management system? What functions should be included in an inventory control system? (34 points) Please make sure that you fully answer these questions. You may use the book and other sources to help you with the answers but you must cite your sources.

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At Wood Products been prepared, the workers usually take the necessary items without bothering to record the withdrawals. Approximately 63 percent of the kits are available for the workers. All workers are required to return the remnants from their kits of materi- als before the end of the shift. THE DECISION At a recent management meeting, the president announced that the production levels would increase by 20 percent during the next month. Dave was anxious to resolve his production problems. Case 6 Austin Wood Products Dave Popsplant manager for the doors and melding department at Austin Wood Products (AWP), was very concerned about the company'slumber stockroom op eration There is no way to know what is available belore you get to the storage area. There is usually a 50 percent chance of obtaining the needed lumber for job The stockroom situation is interfering with productivity COMPANY BACKGROUND Austin Wood Products was started in 1987 by Michael Pricesce gure 6.1). With the fast growing building Industry in Texas, he realized the need for custom manufactured doors. He began manufacturing doors in his garage up until 1982 when he moved to the facility in Belton. As the company began to grow. Price re located to downtown Austin in 1983, and then to the present location, 1165 Guadalupe Road in Austin. The current facility has over 90,000 square feet of pro- duction, warehouse, and showroom space, and employs 130 people. The produc tion process is shown in Figure C62. The 7,000-square-foot showroom displays their vast selection of quality handcrafted and manufactured products, which in clude a complete line of doors, molding, decorative hardware, and entry systems. They are the only company in Austin that builds custom doors AWP's primary customer base is composed of custom builders in Austin, Dallas, Houston, and Fort Worth. AWP has tveir sales staff for in-stock and special orders, and a fleet of delivery trucks that deliver within a 50-mile radius of Austin They also make regularly scheduled visits to the Dallas-Fort Worth area and Houston The authors appreciation to Albon Budner, Maya Dewi. and Seth Gernot for the contribution to the same and data have been dinged Copyright 2005 W. Berton All rights reserved FIGURE C6.1 Organizational Cuart Presiden M Price halo VF Human resou ve Sales VP Production VP. Marketing VP VP Acounting Purchasing agent Mani MAAR Central மழைா Melding supervisor Do prvi 463 6 A Won Prada C6.2 Process Flowchart Customers "ppliers Marketing Master scheduling Manufacture Assemble Warehouse operation Row torials Component- part inventories Finished goods inventories nleries COMPETITIVE PRIORITIES AWP products compete on a high level of service and the idea that they are very flexible. If it can be made of wood, then they will produce it. Plant manager Dave Pope prides himself on the fact that a customer can ask them for anything and he or she will receive it. For example, a customer last year asked them for three in- sulated redwood doors. Not only did Dave know what these doors were, but he has a regular supplier that would send the material promptly. It would utterly be impossible to walk into a large home improvement store and find anyone with the knowledge or resources to fit such an order. In addition to custom-made doors, AWP can make any type of wood molding. For about $300, anyone can have special knives made to make custom molding to fit the décor of his or her house. AWP feels that along with this "anything for the customer" attitude is an excep tional sales and service staff. They have their own in-house sales staff that can as sist customers in choosing the products they need. They also provide delivery for their products, this can lead to shorter lead times and more reliable shipment when everything inside the plant is running smoothly. To ensure that the customers have everything they need with their doors, AWP sells a large amount of hardware with their doors. They stock many items from hinges to locks, all that a contractor or customer would need to install their door. AWP knows from experience that the quicker the door is sent and installed, the less likely it is to be damaged and sent back to the factory. No company wants returns, so they do all they can to ensure that their product is sent and installed correctly. AWP is also very innovative when it comes to how they make their molding and what kinds of doors they can produce. Five years ago, they purchased a new mold- ing machine that allowed them to make an unlimited number of varieties of molding. These new machines could make a larger style of molding, and the cutting knives could be custom cut to fulfill the customers' needs. The workers were sent to Florida to be trained on how to use and maintain the new machines. This may be looked upon as an unnecessary cost to some manufacturers, but AWP wanted to provide the customers with the opportunity to have individualized custom molding. The peak manufacturing period is from February to November. The highly sea- sonal and cyclical product line is closely tied to the construction industry in Texas CA During this time, the company operates a 10w-hour shift for four days per week Monday through Thursday. Each production worker is paid for 10 hours. The 120 production workers are paid, on the average $16.35 per hour Fringe benefits are about 30 percent AWP also installs the glass in the doors as they are being manufactured a lot of other companies do not do this. In fact, other door manufacturers will have subcon tractors install the glass in the field. Mr. Pope stated that the manufacturer cannot control the quality and workmanship that subcontractors do. AWP sends their doors with the glass so that others will not damage AWP's high quality doors CURRENT INVENTORY SITUATION AWP currently does not have a formal inventory management system for the raw materials and finished goods that they maintain in their warehouse. AWP con ducts a complete inventory of raw materials and finished goods once each year. It requires 47 workers to count the items. The inventory count takes two days to complete, from seven o'clock in the morning to five o'clock in the evening. After speaking with the plant manager, Dave Pope, it has become clear to Dave that AWP does not place a heavy emphasis on maintaining accurate inventory records. The president, Mr. Price, believes that since AWP is the only custom-door manufacturer in the city of Austin, they do not need to compete on costs, there fore, there is no heavy concern about reducing inventory costs. The 2008 sales rev- enues were $25,000,000. The average price per door assembly ranged from $450 to $1,250. A second reason not to worry about the lumber stockroom is based on the na- ture of the demand. According to the vice president of production, Mary Smith, the demand for the different types of wood varies from one year to the next. Since approximately 95 percent of their sales come from custom orders, it is difficult for AWP to predict what styles and types of wood will be in demand for year. Custom order sales depend on the trends and preferences of the market. This factor makes it difficult for AWP to predict which types of wood to maintain in stock on a consistent basis and which ones to special order. Inventory turnover is the most important measure of inventory performance because it relates inventory levels to the product's sales volume. Mary Smith estimates that inventory was turned one and three-quarter times each year. any given LUMBER PURCHASING Lumber purchases represent 87 percent of all purchases and dollar value; fasten- ers, hinges, and miscellaneous materials represent the remaining 13 percent of an- nual purchases. Wood is purchased based on discounts, deals, and rebates that are offered by lumber yards. As orders are received, the wood is then allocated to the various orders. The estimated value of the wood inventory is approximately $3.5 million A TYPICAL DAY'S OPERATION The production shift begins at 7:00 a.m. Those workers needing lumber at this time request permission to pick up lumber from the lumber store. In most cases, the lumber and other items have been kitted for the specific job catalog. If no kits have
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Explanation & Answer

Attached.

Running Head: AWP INVENTORY SITUATION

AWP Inventory Situation
Student Name
Institutional Affiliation
Due date

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AWP INVENTORY SITUATION

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Question 1
AWP has not given much emphasis on the area of inventory management. This is mainly
due to the reasons that AWP has no competition as a custom-door manufacturer in Austin and also
because their nature of service production is based on demand from people with custom orders
(approximately 95 percent).These are rather valid reasons but however, there are measures that the
company has to take in the area of inventory management that are critical in company operations.
Conducting a complete inventory of raw materials and finished goods once each year is inadequate.
I would ideally recommend that AWP should ensure that they have daily records of each
item that a specific worker has picked from the store. The behavior that workers have of taking
their necessary items without bothering to record their withdrawals is not to be tolerated. Daily
records will ensure that there is accountability among the workers. Also, this will enable the strict
supervision of company materials at all hours during a shift. In the process, the company can easily
give orders for an item which have depleted in the store. I would also say that there be stricter
supervision of all remnants items that production workers return from their kits of materials before
the end of their shift. These records enable easier supervision of stock levels within the store at all
times.
Finally, I ...


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