Inventory Management the Raw Materials  Case Study

  • Length: 40 pages
  • Sources: 40
  • Subject: Business - Management
  • Type: Case Study
  • Paper: #1685621

Excerpt from Case Study :

52). The researcher handles or controls the items differently. It is a form of Pareto analysis where items such as customers, documents, activities, inventory items, sales territories grouped into three categories namely a, B, and C. In order of their estimated importance. Consequently, 'A' items are very important, 'B' items are important, and 'C' items are marginally important. The organization gives 'A' rating to their best customers since they yield the highest revenue. Sales managers serve them. 'B' rated customers (with more attention) would then follow and lastly 'C' customers whom warrants less attention and are served accordingly.

Advantages of ABC Analysis

ABC analysis provides the materials manager with opportunity to exercise selective control. Thus, the manager will only focus on a few items despite a possible confrontation with a numerous stores of items. When the material manager resorts to concentrate on 'A' Class items only, he is in a better position to control inventories and show tangible outcomes in a short span of time. ABC analysis has helped in reducing clerical costs. Such analysis when applied to various organizations has resulted into better planning and improved inventory turnover (Swamidas, 2000, p. 32). The analysis dictate that the three class items, a, B, and C. ca never enjoy equal attention since it will be worthless and uneconomical. Apart from the costly nature of equal analysis and attention to the three class items, concentrating on all the items will have a diffused effect on all the items, irrespective of the precedence.

Customers who buy the largest quantities of the products are the least in numbers, hence account for the biggest portion of the company's revenue. 'B' customers would then follow characterized by relatively larger number though only manages smaller portions of the product at a given period compared to group 'A'. However, they still manage to catch the attention of the sale assistants who occasionally serve those (Swamidas, 2000).

The customers belonging to group 'A' enjoy not only the benefits of large scale purchases but also most attention given to them by managers of the company with special treatment given to the because only the sales managers serve them. They also enjoy special privileges given their strong connection with the management of the company with majority of them belonging to social class similar to that of managers and senior executives of the company. In essence, economic power displays out in terms of quantities that a given individual will purchase at a given time (Swamidas, 2000). Customers belonging to group 'C' constitute the majority of the buyers though minority in terms of quantities purchase after a given period. Due to their meager income, they do not purchase products in large quantities. Hence, do not enjoy special treatment as well as privileges contrary to group 'A' and 'B'. Customers belonging to category 'C' purchase the products in very low quantities.

Economic Order Quantity

Economic order quantity (EOQ) is the order quantity used to minimize the total holding and ordering costs annually. The Economic Order Quantity model gives a good indication of whether or not current order quantities are reasonable. The following are assumptions regarding the economic order quantity: The Economic Order Quantity (EOQ) is relatively uniform and has known demand rate, it has fixed item cost, fixed ordering and holding cost, and a constant lead-time. The model is applicable when the demand for an item shows a constant or almost constant rate when the entire quantity that is ordered arrives at one point in time. According to David Anderson and Dennis Jay, the average inventory is half the maximum inventory or 1/2 Q. During the production run, inventory buildup occurs and constant depletion rate occurs during the non-production period. Therefore, the average inventory would be one-half the maximum inventory. However, the production lot size Q. In this inventory system, does not go into inventory at one point in time. Hence, the inventory will hardly reach a level of Q. Overall; the Economic Order Quantity represents the optimum order quantity a company should rightfully hold in its inventory considering the set cost of production, rate of demand among other variables.

Formula of Economic Order Quantity (EOQ)

Different formulas already developed for calculating the Economic Order Quantity (EOQ). The following formula is applicable in the calculation of EOQ.

A = Demand for the year

Cp = Cost to place a single order

Ch = Cost to hold one unit inventory for a year



S = Setup costs

D = Demand rate

P = Production cost

I = Interest rate (considered an opportunity cost, so the risk-free rate can be used

Inventory Model with planned Shortages

A shortage refers to a demand never supplied. In several circumstances, short ages are undesirable, especially from economic point-of-view. The shortage results mainly from economic disparities mainly due to class struggles. The well endowed in the society enjoy special privileges in the society as opposed to the masses who lack economic power and resources. Hence, they have limited choices to make compared to the high-end caliber who have the whole world with them. The model order in the section takes into accounts the type of shortage called backorder.

In a supplying electronics, a company maintains a proper management system for its inventory. The company manufactures and supplies many electronics for home consumption and distributes the rest to outside countries. If such a company is a monumental, company and controls a large part of the electronic market in the world. According to Tommey in his publication, changes in the market practices changed to a great level the methods companies use to manage inventory. The current market trends dictate that the customer is the centre of the industry (Tommey, 2000, p. 42). In electronics business, the company faces much competition from many other established electronics dealers, and producers. Some of these companies have bases in other countries but still export electronics to Thailand, and many other countries in which, different companies have potential to dominate the market.

In the management of stock, the company has to maintain minimal stock since the electronic sector is undergoing exceptionally rapid changes. Technology is a key factor facilitating this change. Some companies experienced this when there was a shift in demand of market preference of televisions. New technology created a demand for digital televisions. While inventory in the form of raw materials stored was applicable to develop new digital televisions, the finished televisions posed a threat. The company had to incur losses at the end since even changing the made televisions from analog to digital called for more work, which needed resources that were not initially expected (Tommey, 2000, p. 42). These resources the company drew from profits, and money initially budgeted for different activities other than renovating already finished goods.

While this is vital, it is a necessity for the country to maintain buffer inventory, which should help in managing to cater for unseen market forces. The main aim of such a management principle according to Tommey is to avoid a situation where the company might go out of business due to lack of stock. This will create room for other competitors to dominate the company's former market. If the company goes out of business for some time, it will be hard to reclaim its former position, as customers will start to question the credibility (Tommey, 2000, p. 42). The company will lose chances to make a profit during that period, create a market gap, and make even loyal customers question the quality of goods. The most imperative part of this principle of inventory management is to maintain, and manage inventory as raw materials.

Inventory management in supplying for a wholesale company that handles electronic goods is at times hard because of the unpredictability of the market. Unlike other goods, electronic goods are not repetitive. Customers buy these goods once and stay for quite a long period without buying another as the need to buy another arises only if it damages or the owner loses. This makes it hard to determine the need for goods at a certain place due to low predictability. Lack of effective inventory management will see the company fail to enjoy economies of scale. Such a company according to a journal by Cannella called 'On the Bullwhip Avoidance Phase: supply chain collaboration and order smoothing' will incur extra costs in supplying (Cannella, & Ciancimino, 2010, p. 22). The company cannot risk supplying goods in bulk to one place, as either this will see the goods lack customers, or the company forced to ferry the goods to another destination, which will lead to incurring extra transport costs. This makes it mandatory for the company to haven inventory management plan as it acts a draft to business success (Cannella, & Ciancimino, 2010, p. 22).

Inventory in the company comprises a classification of many items necessary in running a company. Raw materials, plants and machines to work in progress are all part of inventory and are the main factors…

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