Question

Parker Hi-Fi Systems Parker Hi-Fi Systems, located in Wellesley, Massachusetts, a Boston suburb, assembles and sells the very finest home theater systems. The systems are assembled with components from the best manufacturers worldwide. Although most of the components are procured from wholesalers on the east coast, some critical items, such as LCD screens, come directly from their manufacturer. For instance, the LCD screens are shipped via air from Foxy, Ltd., in Taiwan, to Boston’s Logan airport, and the top-of-the-line speakers are purchased from the world-renowned U.S. manufacturer Boss. Parker’s purchasing agent, Raktim Pal, submits an order release for LCD screens once every 4 weeks. The company’s annual requirements total 500 units (2 per working day), and Parker’s per unit cost is $1,500. (Because of Parker’s relatively low volume and the quality focus—rather than volume focus—of many of Parker’s supplies, Parker is seldom able to obtain quantity discounts.) Since Foxy promises delivery within 1 week following receipt of an order release, Parker has never had a shortage of LCDs. (Total time between date of the release and date of receipt is 1 week or 5 working days.) Parker’s activity-based costing system has generated the following inventory-related costs. Procurement costs, which amount to $500 per order, include the actual labor costs involved in ordering, custom inspection, arranging for airport pickup, delivery to the plant, maintaining inventory records, and arranging for the bank to issue a check. Parker’s holding costs take into account storage, damage, insurance, taxes, and so forth on a square-foot basis. These costs equal $150 per LCD per year. With added emphasis being placed on efficiencies in the supply chain, Parker’s president has asked Raktim to seriously evaluate the purchase of the LCDs. One area to be closely scrutinized for possible cost savings is inventory procurement.

What cost savings will Parker realize if it implements an order plan based on EOQ?

Answer 1

We can observe in the above case, the company is incurring heavy loss due to the costs incurred in the inventory procurement and management process. Cost such as labor cost, transportation cost, capital costs, holding costs such as space costs, wastage or damage costs, insurance costs, taxes, etc. These are directly affecting the cash flow and profitability of the organization. Thus, it is imperative to curtail on these costs to maximize profit and deliver value to customers.

Following are few suggestions that Parker may implement in order to optimize/ reduce these costs using an order plan based on EOQ:

• Have yearly contracts for regular items so as to avoid the rework of offer request generation, negotiation, order preparation, etc.
• Try to procure from nearby vendors to reduce transportation, insurance costs and risks.
• Maintain minimum ordering quantity level.
• Automatic replenishment for material with definite demand.
• Reduce motion of material in the warehouse. Allot place for each material as per suitability (requirement, size, weight, type, etc.)