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High Inventory as a Reason for Low Operating Margins

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Carls Computers has always prided itself as a business by providing a customer service level policy of 98%, but lately, inventory management problems have caused their provided service level to decline significantly. This has negatively affected their customer base, the company’s reputation, and it created a high level of customer dissatisfaction. The lack of timely availability of certain critical parts required for service customers has been the major cause for service customer call delays in timely service orders. Due to the fact that their service quality has been declining customers are paying more attention at price, but due to already extremely tight margins, significant price discounts are not possible further eroding sales2.
One of the main reasons for low operating margins are the extremely high inventory and carrying costs of the company, therefore the company is extremely concerned by this trends3. Carls Computers needs to analyze their inventory and customer order handling procedures in order to improve their operations and be able to provide the level of service their customer base has come accustomed to. Rosa noticed also that there needs to be better functional alignment between the manufacturing operations and engineering department. The company’s management needs to better handle the logistics of production and part inventory timing between currently the manufactured product line, negative inventory, and new designs coming down the pipeline for introduction4. Management is always demanding the purchasing department to control costs, but organizationally constant conflicting demands between the currently manufactured inventory requirements and new product introductions (which typically require new parts) are driving inventory costs out the roof. Premium freight costs due to expedited shipments of critical parts are also out of control.