Consolidated Electric Case Study
Executive Summary
Consolidated Electric (CE) is a mid-Western wholesale distributor of electronic goods for the construction industry. These include wire, electric boxes, connectors, lighting fixtures and electrical controllers among others. The company carries 20,000 separate line items in inventory that are produced by over 200 manufacturers. Items are priced from under one cent to several hundred dollars. The top 2,000 items produce 50% of sales, the next 8,000 items account for 30% of sales while the final 10,000 create only 20% of sales. Consolidated Electric continuously purges products so that they carry only items that are ordered at least once a year so that the company can maintain a policy of “Good customer service at a reasonable cost.”
Inventory management has been operated under a system referred to as “earn and turn.” Under this program the company sets a ratio of gross profit margin multiplied by inventory turnover that must meet company requirements of 2.0. This level is subject to change and is set at the beginning of each year by Joe Henry, the company’s owner. However, this method, while effective in controlling profitability of the business and product lines, is an ineffective means for controlling inventory. Some stockout conditions result while other items are ordered in sufficient quantity to last years. Individual line items are managed under a cardex running inventory system where product is recorded as it arrives from the manufacturer and then reduced as sales are made. Each card includes a reorder point that is determined by judgment and past experience. Cards are reviewed weekly and reorder quantities will range from a month’s supply for more expensive items to a three month supply for those that are less costly. Over the past two years the company has shown interest in converting to a computer driven system, but it is far from full implementation. While the data used has been accurate when compared to accounting records
Consolidated Electric (CE) is a mid-Western wholesale distributor of electronic goods for the construction industry. These include wire, electric boxes, connectors, lighting fixtures and electrical controllers among others. The company carries 20,000 separate line items in inventory that are produced by over 200 manufacturers. Items are priced from under one cent to several hundred dollars. The top 2,000 items produce 50% of sales, the next 8,000 items account for 30% of sales while the final 10,000 create only 20% of sales. Consolidated Electric continuously purges products so that they carry only items that are ordered at least once a year so that the company can maintain a policy of “Good customer service at a reasonable cost.”
Inventory management has been operated under a system referred to as “earn and turn.” Under this program the company sets a ratio of gross profit margin multiplied by inventory turnover that must meet company requirements of 2.0. This level is subject to change and is set at the beginning of each year by Joe Henry, the company’s owner. However, this method, while effective in controlling profitability of the business and product lines, is an ineffective means for controlling inventory. Some stockout conditions result while other items are ordered in sufficient quantity to last years. Individual line items are managed under a cardex running inventory system where product is recorded as it arrives from the manufacturer and then reduced as sales are made. Each card includes a reorder point that is determined by judgment and past experience. Cards are reviewed weekly and reorder quantities will range from a month’s supply for more expensive items to a three month supply for those that are less costly. Over the past two years the company has shown interest in converting to a computer driven system, but it is far from full implementation. While the data used has been accurate when compared to accounting records