Statement of the Problem

Problems
The 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.



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 of
inventory 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 manufacturing
process, 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

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.