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Statement of the Problem

ProblemsThe companys lumber stockroom operation is not going wellshort term.

Raw materials and finished goods are not well maintained.

Its organization structure is vaguelong term

Symptoms:

No guarantee for sufficient materials in storage.

No accurate inventory record.Relevant costs are high, i.e. carrying cost, indirect cost.

Root causes:

The uncertainty of inventory demand, which is 50%.

Lack a well-organized inventory management system.

The duties of its purchasing department are not clearly defined.

Support from top managers is insufficient.

Decisions facing the manager:

Increase production levels by 20%

Establish a valid inventory management system

Clearly define the organization structure

Cut down the unnecessary cost

Analyze previous trend and data of sale, then make targeted prediction.

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Analysis of the problems

The uncertainty of inventory demand, which is 50%.

The demands of various types of wood differ from year to year because 95% of AWP sales come from custom

orders. It is quite difficult to predict the demands for the different woods. In the case, the demand ofinventory is dependent on the requirement of final product. Because of the uncertainty of inventory forecast,

the safety stock cannot be determined which will result in stock out to some extent.

Lack a well-organized inventory management system.

No formal inventory management system exists in AWP currently about how many raw materials and finished

goods are maintaining in their warehouse. Fact can be known from the text that workers usually took the

items from warehouse without any record. As a result, they need spend great efforts and costs(especially the

carrying cost) to count the items in the warehouse every year.

The duties of its purchasing department are not clearly defined.

Three types of purchasing authority areExpress authority, implied authority and emergency authority.

However, the authority of the purchasing manager has not been clearly defined and communicated via

corporate policy. In addition, the purchasing function is supposed to be an integral part of the manufacturingprocess, but in AWP it only reports to the VP of Finance. This kind of centralized purchasing will also cause

some disadvantages, for example, increase need to coordinate purchased parts with production schedules.

Support from top managers is insufficient.

The plant manager ignores the improvement of inventory management system also he knows AWP put little

emphasis on maintaining accurate inventory records. The president of AWP thinks they do not need to reduce

the inventory costs because of their irreplaceable status in local market. Based on the top managers attitudes

towards the unimportance of inventory management, their support is quite inadequate.

Causes of the Problem

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Specific reference to support conclusion

From course PPT chapter 1 page 37 & 44, centralized purchasing Involves

coordinating all purchasing activities for the entire organization through one

central location. Majority of significant dollar-valued purchases will continue to be

centralized

Course PPT chapter 5 page 6 states that inventory is the life blood of any business.

Course PPT chapter 5 page 8 states that management of inventories is a major

interest of purchasing managers. In many industries, the investment in inventories

comprises a substantial portion of firm assets (generally 60-80 percent).

From course PPT chapter 5 page27-35, EOQ model can be used to find out the

economic order quantity, which can lead to minimum total cost based on the

optimal balance between order cost and holding cost.

Implications of not solving these longer term issues

The organization structure is unreasonable that the purchasing department has no

specific responsibility and has insufficient communication with manufacturing

department. From the long-run, the unsuccessful inventory management will

result in increase of holding costs and limitation of production capacity.