Question

Company ABC is the leading manufacturer of branded microwave ovens in India. Fifteen years ago, the ABC line of products had about 15 models of microwave/ OTG/ combination ovens/ grills. Today, with increasing changes to the Indian consumer's palate, and the requirement for multiple options and product range for customers, the product line has become more complex. ABC currently manufactures and sells 300 models/ variations. Within this, the number of colours sold by the company in each model has also expanded. Overall aggregate planning and scheduling have become quite complex. In the past, ABC met demand by carrying a huge inventory for a 100 distributors spread across India and thousands of small dealerships. The company was used to manufacturing and shipping tens of thousands of ovens without even knowing when they would be sold. With the current range of products and increasing volumes, the company is struggling with complaints from dealerships of long leadtimes for replenishment, high inventory levels at the dealers/ distributors, increasing stocks of withdrawn/old products. Customers are writing to the company about a confusing product offer and dealers trying to push what they have rather than giving the customers what they ask for. The company itself has seen its DIO (Days Inventory Outstanding) move up from about 45 days to 80 days over the last few years. Overall interest payments on working capital have tripled over the last 5 years while sales has only grown by a cumulative 50%. What needs to change operationally?

Answer 1

Company ABC should implement Just-In-Time inventory management, streamline their product range, and apply demand forecasting to operationally adapt to their current challenges of increased product complexity and inventory management. Emphasizing economies of scale without overproducing is also crucial.

Step-by-step explanation:

Company ABC is facing operational challenges due to an increase in product complexity, rising inventory levels resulting in higher days inventory outstanding (DIO), and increased financial costs. With ABC currently manufacturing and selling 300 models/variations, they are experiencing complaints from dealerships of long leadtimes, dealer overstock, customer confusion, and inefficient capital use. What needs to change operationally for ABC is a refined approach to inventory management, production planning, and product portfolio simplification.

Adopting strategies such as Just-In-Time (JIT) inventory management, streamlining production through SKU rationalization, and incorporating demand forecasting tools can significantly reduce lead times and inventory costs. Embracing these changes would not only lower days inventory outstanding (DIO) but also align production closer to actual demand and consumer preferences.

Furthermore, finding the right balance of economies of scale, while avoiding the pitfalls of excess production, is imperative. ABC should focus on optimizing their production levels, similar to how a production plant achieves lower average costs of production through economies of scale, as illustrated by the concept of not exceeding the optimal output level for cost savings depicted in Figure 33.5.