Inventory has gotten a bad name in the era of Just-in-Time inventory systems, but inventory has an important function in production firms.
While there are a variety of types of inventory, its progression from raw materials, to work-in-process, to finished goods is typical of many firms.
An example of ABC Analysis is provided from the following reading and video of the Wheeled Coach Division of Collins Industries, the world’s largest manufacturer of ambulances.
Inventory control at Wheeled Coach Ambulance
Firms like Wheeled Coach spend over half of their sales revenue on purchases. These purchases are often in inventory and represent a huge portion of Wheeled Coach’s assets. But, perhaps even more importantly, the ambulances cannot be built if the proper inventory is not on hand when needed. Because of the cost and critical nature of inventory, Chapter 12 deals with inventory management.
Two important inventory management techniques are ABC analysis and Cycle Counting. Wheeled Coach uses both. But effective inventory management begins at the design stage. Efficient inventory control requires knowing what is needed. Bills-of-material (BOM) provide this knowledge. Therefore Wheeled Coach spends substantial time and effort making sure the BOMs are correct. Only then does it know what to purchase and have available for the production process.
ABC analysis
ABC analysis helps firms develop policies and procedures for controlling inventory. 'A' items are the expensive items such as the chassis (usually purchased from Ford), aluminum (from Reynolds Metal), and plywood used for flooring and cabinetry (from local suppliers). These few items constitute the majority of the inventory values at Wheeled Coach. They are tightly controlled, from purchase to use, with effective security. Orders are negotiated to maximize quantity discounts while minimizing on-hand quantities. Some items, such as aluminum, must be ordered as much as eight months in advance. ‘B’ items are less expensive and controlled less tightly. Finally, 'C' items have less control, but all items are stored under lock and key and only removed from a secure area if they are on a BOM.
cycle counting
Part of the control of inventory items at Wheeled Coach is cycle counting. Under cycle counting, 'A' items are counted on a very short cycle, perhaps once a month to verify transaction accuracy. 'B' items are counted less frequently, perhaps every two months. And 'C' items are verified once a quarter or even less frequently. Cycle counting provides a much more effective auditing procedure than periodic (annual) counts of inventory.
Only by driving down purchase costs and maintaining tight control of inventory can Wheeled Coach control its total costs. With 45 competitors and orders that are usually won only after a bidding process, Wheeled Coach has no alternative to effective inventory management.
Answer the following questions. A paragraph or two to be sufficient to answer the questions noted. Showing that you understand both the answer and the question by the examples that you note and the explanation that you provide.
1. Explain how Wheeled Coach implements ABC analysis. In your answer, use as many examples as you can recognize.
2. Which type of process design is Wheeled Vehicles? Explain.