Problem: Inventory at Champion Electric

Champion Electric, a regional supplier of electrical and electronic components, keeps thousands of SKUs (stock keeping units) of various products on hand for its customers. A new operations manager, Barb Patterson, has just been hired to replace Bob, who resigned because of customer complaints and management pressure to keep inventories in check. Gil, a longtime warehouse manager reporting to Barb, has been filling her in on past performance. "Bob was a good manager who always did what the bosses wanted him to do. He just couldn't do everything. Management was upset with Bob about customer service, the number of people we have working in this area, and more recently, with the overall level of inventory." "Barb, I think you need to put some pressure on marketing to stop adding products, and while you're at it, we should get rid of many of the items that sell so infrequently that you have to dust the box off to read the label. We always have the higher volume, more profitable items in stock-we keep lots of safety stock so we never run out." "We are always getting hammered because of customer complaints, and yet our records show that we have a fill rate of 99.9 percent. With over 30,000 SKUs, you can't get much better than that. None of our competition has that kind of service. At the same time, every other order has a request for some piddly item that we don't have in stock. Sometimes our system even shows we should have stock but we don't. When we don't have an item, we have to reorder it or expedite it or do something extraordinary to make sure the customer gets the product-and many times it's late. That takes people and time. It drives us crazy.

We shouldn't sell all of these things. You just can't keep enough inventory." Gil continues, "But adding product every day just makes it worse. Marketing always makes the case that it is our strategy to supply customers a ‘full line' of supplies- that means we have to add a product if there is demand for it. Customers often decide they want a new and improved version of what we are stocking and we almost always try to get them what they need." Barb questions, "How do we add these items-what's the process?" "Sales makes an estimate of what they think they can sell and then we place an order. We try to determine the best ‘economical' volume to buy of that item when we place the order. The problem is that even though customers say they want these new items, many times these things are never ordered after the first time. Would you believe that we have some 20 percent of our inventory classified as dead-it hasn't moved in over three months." Later that day in President Campos's office, Barb gets some more information on her new mandate. "I have continued to invest money in inventory but there is a limit to how much we can afford. Customers are still complaining. I know that our inventories are higher than our competitors-I have backed that idea so that we could get a higher customer service rating than our competitors. But I'm not sure our service is any better; and, I know our inventory is higher. You have to get this thing under control."

Questions

1. Why, in your opinion, is senior management so concerned about the "high" inventory levels at Champion Electric?

2. What would you suggest to Barb as steps to take in addressing the concerns of President Campos?