Inventory Management - Issues & Recommendations

 Possible Issues

    1.    Over Stock Inventory

Harbor Freight Tools uses the Periodic Review System and uses Safety Stock Inventory and Anticipation Inventory Methods which cause overstocked inventory.

    2.     Damaged Inventory

Harbor Freight Tools has damaged merchandise in their inventory. These products are either broken or missing sections. There are many causes why inventory may be damaged such as employee accidents, transportation mishaps, or vendor mistakes such as equipment malfunctions. The damaged products lose their value or cannot be sold which creates a loss of sale.

    3.     Low Inventory Turnover

Harbor Freight Tools has a low inventory turnover.  They have a lot of merchandise that is damaged or merchandise that cannot be found due to overstocking which causes lower revenue and cost of goods sold. When calculating the inventory turnover ratio, lower cost of goods sold results in lower turnover. The company does not efficiently manage their merchandise which reflects in a low turnover.

Recommendations

1.       Harbor Freight is currently using the periodic review system. This causes a large amount of inventory because items are always ordered at a fixed time. When demands are low for a certain product, and it is time to order inventory managers should not order that certain product but they do. This causes an overstock problem.  This overstock problem would be resolved if Harbor Freight would switch to the Q, Continuous Review System. By using the Q system the same quantity of products would be ordered but the time when they are ordered would not be fixed. The managers would determine when certain items are low in inventory, and then place the order.  The Q system would create a nice flow of products being sold and products being ordered. To Reduce Safety stock inventory, our company managers should place orders closer to the time that they should be received.  Another way of reducing safety stock inventory would be to shorten the lead times of the items we purchase. We can accomplish this by seeing if there are closer suppliers with shorter lead times to purchase our products whenever items need to be ordered.  The book states that “the primary lever to reduce anticipation inventory is simply to match demand rate with production rate”. Harbor freight managers should figure out which tools and other items are in high demand and at what times of the year. Since harbor freight sells a large variety of tools and merchandise, they should offer new products that have different demand cycles. By doing this the peak in the demand for one merchandise will compensate for the seasonal low for another. This would help lower the large amount of inventory because the managers would not order large amount of all the products only the ones that are in demand at that time. Although Harbor Freight does offer their wonderful 20% coupons and great pricing, one way of maybe reducing their current inventory is by offering bundle products. A great way would be to offering a buy one get one 50% off on certain products or brands they have a large amount of in inventory. This would reduce the storage cost, improve sales, and also reduce shrinkage.

2.       Inventory damage can be lowered by training the employees on proper product placement as well as arranging all the products in a manner that they are easily accessible. Also tracking consistent damages can often help identify the original cause of the damage. By having proper documentation of the damaged or missing merchandise the company can to fix the issues in the manufacturing process, shipment or in employee handling. This would help reduce the large amount of our damaged inventory.

3.       The best way to fix the inventory turnover is to implement the solutions that we have suggested for over stock and damage inventory. By fixing the issues with overstock and damaged inventory, more products will be sold therefore increasing cost of goods sold which results in a higher inventory turnover.