Inventory Management the Raw Materials,

Inventory Management

The raw materials, goods in process, and finished products represent different forms of inventory. Every stage of production of commodity represents money tied up until the inventory finds its way out of the premises as purchased product. The merchant stock, for instance, contribute to profits only when by selling them money goes into the cash register. Inventory management is instrumental in the determination of what are on hand, where it is used and how much finished products results. An efficient inventory management involves watching over constant flow of units in and out of already existing inventory. The business entity will control the transfer of units, which in the end makes the inventory remain at manageable levels.

Saxena (2009) attests to the significance of inventory system in collecting and processing large quantity of data. He believes that introduction of computer in the 1950s is responsible for reduction of cost of handling data which was quite high in the pre-computer days (Saxena, 2009, p. 1). Consequently, there was renewed interest in the inventory theory, which marked the beginning of an era characterized by large-scale inventory systems. He defines inventory as idle resources of any kind that have potential economic value and always considered as locked up capital. They are the goods as well as materials held available in stock by the business entity.

Conversely, he considers inventory management as the process of managing stocks of finished products, semi-finished products and raw materials (Saxena, 2009, p. 2). Inventory management is a continuous process with various kinds of solutions available. The organization must employ qualified staff with relevant knowledge, skills and specialization in managing inventories. The whole inventory management exercise begins immediately the production commences which involves ordering raw materials, production of partially finished products and any other important material from the supplier. A competent management of inventory also aims at controlling the costs that are associated with the inventory from the perspective of total value of the commodities and the tax burden generated by the cumulative value of the inventory (Saxena, 2009, p. 3).

Three key aspects of inventory the business enterprise must consider when managing its inventories include time, calculating buffer stock and keeping accurate records of finished products ready for shipment. It is imperative for the organization to understand the duration the supplier would take to process an order and execute delivery. Buffer stock refers to extra units beyond the minimum number necessary for maintaining production levels (Saxena, 2009, p. 3). The manager of the firm may resort to keeping one or two additional units of an electric device for emergency purpose or in the event that a unit already installed unit proves to be defective. Inventory is hence a stock of anything necessary for the success of a business venture. Proper management of the stocks would ensure maximum profits.

Successful Management of Inventory

Successful management of the inventory will guarantee increase in turn over volume and profit-maximization. This involves balancing the inventory costs with benefits associated with the inventory. The manager of the organization should consider the direct costs of insurance, storage, taxes and cost of money tied up in the inventory. Other strategies that are fundamental for effective inventory management include maintenance of a wide assortment of stock, increasing inventory turnover, keeping the stock low without sacrificing performance or service, obtaining lower prices by purchasing in large volumes and possessing adequate inventory. Inventory management plays a vital task of keeping the correct balance, the controller being inventory manager, stock planner or logistics controller. Changes in market and financial forces along with the amount and type of stock control vary with the demand. Successful inventory manager will ensure keeping of the balance right because stock control is typically a dynamic activity.

The Goals of the Inventory

Minimization of inventory investment while still meeting the functional requirements is the primary goal of inventory. According to John Toomey (2000), an improvement in dependability of the process as well as forecasting allow for reductions in inventory with positive maintenance of the most desirable levels of customer service and manufacturing efficiency (Toomey, 2000, p. 45). Another goal of inventory management is to reduce work in progress, which translates into a reduction of lead-time thereby leading to greater flexibility of manufacturing. Inventory management would ensure safety of inventory. Keeping the inventory in a safe area with assurance of protection against theft or vandalism is mandatory for success of the organization.

Depending on the magnitude of the organization, the management could use surveillance equipment, guards or alarm system to safeguard the business premises including the inventory (Toomey, 2000, p. 45). The management and other employees who can access the inventory should handle it carefully to avoid breakage as broken or lost inventory causes the business to suffer huge losses financially. Other goals include effective process flow best accomplished through setup reduction, simplification of bill material, and operation synchronization (Toomey, 2000, p. 45).

A concerted and continuing inventory management is foreseeable in order to attain these goals. A properly maintained inventory will boost confidence of the organization in crucial decision-making such as purchasing of raw materials and semi-finished products. Inventory management will also foster determination of selling price of goods and services a business entity specializes in as well as simplifying calculation of profits resulting from sale of its merchandise. Inventories allow customers to make choice of commodities to buy by comparing the prices of various organizations producing the same product (Toomey, 2000, p. 45).

Although organizations have varied costs of production, the customer will be in a position to make good choices by evaluating the advantages of commodities produced by one company over the other, mainly in terms of quality, quantity, pricing, accessibility and availability. The inventories will also allow the business entity to track sales of its manufactured products. One of the most important reasons for inventory management is to track and review the company sales on regular basis.

The managers of the corporation will identify items that do not sell and those in demand through habitual review. The data derived from the review would be important in controlling quantity of items and time to order them. Incidentally, the firm should always avoid excess stock but at the same time ensuring the highly sort out commodities are available throughout the trading period. The organization would encourage inventory management to ensure the accuracy of inventory systems (Muller, 2011, p. 2). The organization has a tricky responsibility to ensure no incorrect information displays in the inventory databases as it could translate to unnecessary speculation, loss of trust and confidence in the organization among its esteemed customers, leading to some customers shifting loyalty to a competitor. Inventory management would also eliminate excess products. The organization can keep dead stock off the shelves courtesy of successful management. The business is under no obligation to keep products that do not sell since they drain company's limited resources. The enterprise may return stock that is not selling or simply offering products at lowered prices to another company (Muller, 2011, p. 2). The inventory cost fall under ordering cost and holding costs. Ordering costs is independent of actual value of the goods. Holding costs include the cost of capital tied in the inventory, which is the opportunity cost of money. Other costs include storage cost (warehousing), cost of handling the equipment and stock keeping staff. The inventory would help an organization that is suffering from poor cash flow to redeem itself thereby boosting customer confidence in the management of the entity (Muller, 2011, p. 2).

ABC Analysis

The analysis is a management tool for categorizing inventory. The inventory consists of many different parts. Each part exhibits a vastly different attributes. The glaring attributes distinguish one part from the other. Hence, every part requires a relatively specialized management effort and control. ABC analysis is applicable in areas where parts of the inventory have clear differences and each part requires treatment very different from the rest of the structure (Gopalakrishnan & Sundaresan, 2003). The primary target of ABC analysis is the existing groupings of various parts that facilitate appropriate control, effective progresses and proper management. A typical result of ABC analysis indicates that the researcher is likely to find that over 80% of the parts of the inventory representing a meager 20% of the value. According to Gopalakrishnan and Sundaresan (2003), ABC analysis is a management tool that enables top management put much effort where results will be greatest. The technique popularly referred to as Always Better Control, has universal application in many areas of human endeavor (Gopalakrishnan & Sundaresan, 2003).

The outcome would be three distinctive groups of parts with differing attributes. The researcher will configure the processes and workflow around the groups through cycle count processes, procurement and sourcing processes and material handling processes. Overall, ABC analysis is a materials management process. Although less complicated to carry out, it requires accurate and historic data. ABC analysis refers to systematic analysis of range of items with different levels of significance (Gopalakrishnan & Sundaresan, 2003, p. 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

Alternatively,

Where:

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 that contribute to success of the company (Cannella, & Ciancimino, 2010, p. 22). While most of these are tangible, the company needs to strike a balance, because of existence of intangible part of the company who play managerial positions in the company, but their contribution affect the company indirectly. The management of such company is the one that should design, and administer inventory management to ensure the company follows all the guidelines as laid down in the inventory management plan. In this case, a proper inventory management plan is a necessity because the management does not provide direct profits to the company. This leaves the company with the duty to identify ways to come up with the extra expense for which there are no returns to pay the management (Cannella, & Ciancimino, 2010, p. 22). In this case, the management must work a plan to determine a way to earn the extra expense by determining a way to earn the extra. This is the main reason why managing inventories is vital for the company as only then will the company maintain a working balance. As the company fails to have this, according to the journal the future of such a company is not certain even though they get a market with consistent demand.

In managing inventory, the company needs to have separate approaches to manage the inventory. One essential method of managing inventory is the ABC analysis (Wright and Race, 2008 p. 60).

Every company operating in different kinds of markets will require comprehensible categorization of priorities when it comes to inventory management. This will be in respect that a different amount of inventories will amount to different outcomes and generate different sales when put in the market. In this company, supplying electronics the company supplies more than 60 different brands of electronic materials. These different brands have different costs in the market and have different costs of sale and operation costs. In such a case, the management will need to have a prioritized way of managing the inventories to suit the company's ability and meet the demand expectations in the market.

The importance of ABC analysis is that it allows categorization of stock according to how valuable the stock is. The ABC analysis categorizes inventories in three levels. The first category of stock comprises of type a, which is category with inventory of better quality, and higher price. Whatever the use of this inventory might be, when it comes to market value, commodities of sale fetch a higher price. According to Wright and Race, in their publication they note most of a company's survival depends on inventory in category a. Almost seventy percent of the company's inventory is in this category (Wright and Race, 2008 p. 60). The other categories that follow are not as valuable as the category a, but they help to bring in a substantial amount of resources. Inventories of group B. are a necessity that must accompany the inventories in category a most of the time. Group C. is mostly by products of the production of the main commodities. The authors refer to this principle of managing stock as a principle that always sees there is Always Better Control.

A journal report by Mitsushi and other writers show the ease at which companies can adopt the ABC analysis, at a remarkably low cost and still manage their stock effectively. One of the strong points of this method is that the management maintains the inventory in the form of numerals. This means that it is easier to represent the numbers graphically and get a way to maintain proper control just at the glance of a graph (Mitsushi & Kimura, 2008 p. 77). Illustrating such an indispensable part of the business of a company will first ensure the management, and others responsible will always exercise caution when ordering any inventory. Confusion in such a scenario according to Tommey will only amount to poor performance by the management and put the whole company at the risk of bankruptcy. In such an evident exposure of how things should run, the management can the easily doctor their options, and get what is most necessary. Putting items against each other on graphical representation is a better way of ensuring that the inventory management always has control (Tommey, 2000, p. 42).

A company should try to classify their entire inventory in ABC analysis no matter what. A company that relies on the management to make decisions on how to move their inventory is at risk when the management decides to rely on their experience and judgment. Involving the management only in inventory management without a categorized plan that determines how to move denies commodities freedom in the market. Such a method of managing inventory does not put the customer as the centre of the market. The management of such company moves inventory in the market to its best knowledge, not the demand in the market. Mostly in such cases, the management does not observe the market forces (Cannella, & Ciancimino, 2010, p. 48). From purchasing of raw materials, to processing the raw materials to finished goods to the final goods in the market, there is extremely little involvement of the inventory management need.

The biggest mistake a company can make in inventory management is to fail to adopt a management plan because the company markets a many brand of things. According to Mitsushi and his fellow writers in their journal state the importance of having inventory management for every inventory the company handles. This will involve the inventory that will finally see its final form into the market for sale, and some that do not end up as finished goods. Many researchers agree that companies with more than one brand in the market need to manage inventory collectively instead of individually. Managing inventory attributed to a single brand individually, will consume time, and will be expensive for the company. Such a plan will need more workforces, and in case of introduction of another item, some times the cost will exceed the income such an investment generates. The only advantage of such a plan in inventory management is the consideration given to each brand item. Such a plan will award concentration into each item, and hence increase the chances of better accurate results (Plenert, 2007, p. 22). The only problem of involving this is when a market is not predictable. Such accuracy even though eminent, for a market lacking consistency, and predictability is not particularly helpful.

Economic Order Quantity is one inventory level all companies will want to have as it balances the entire costs of doing business. A company achieves EOQ when the company fully reduces organizational costs and carrying costs according to Durbin in his book where he focuses on essentials of management. In determining the EOQ, one has to consider all the costs of doing business the individual will incur (Dubrin, 2009, p. 207). Expenses like the cost of doing business and interests paid on loans are all part of this EOQ. Annual demand for products multiplied with the cost of placing an order, and the fixed cost of goods divided by annual operational costs gives the EOQ. This is vital especially to a company that has repetitive products. This means that the company produces the same goods in its time of operation. Many companies that need inventory management fall under this category. All of them produce the same goods and once they replenish the produced stock the company embarks on producing some more goods. If a company calculates and gets the EOQ data accurately, the company computes a formula that is easy to follow, and hence improve inventory management in the company.

In determining EOQ that a company can rely on, the people computing have to be aware of certain assumptions. The main aim of creating these assumptions is to allow the company to have an EOQ that closely represent the way the market is, but does not show the accurate numbers. EOQ is a mere assumption but not a fact of the way the market looks like. It is not possible to determine the accurate EOQ as an aspect of EOQ relies on market behavior. Individuals that demand for these goods keep on changing their tastes and preferences that prompts these assumptions. This is also the main reason why companies need to compute EOQ annually (Lucey, 2003, p. 239). On attaining, this level, the company has to make decisions on some key possibilities of doing business cheaply. While the company might want to produce some goods, it is vital to consider how economic they are. At times ordering some goods is cheaper than producing their own goods. This increases the cost effectiveness of doing business, which reduces operational costs hence, increases profits.

One assumption made when calculating EOQ is that those computing know the cost of stockholding. This cost has to be constant for an accurate reliable EOQ, and when one gets a determined EOQ, one has to assume the costs used were constant. Another important factor in a company is the ordering process. While some companies that do not do proper inventory management might think order cost is all the cost associated with the ordering process, but that is not the case. The ordering process has other costs that the company will incur other costs in the process of ordering. In computing the EOQ, the people computing have to assume all the ordering costs are not only regular, but also known (Winston et al., 2009 p.42). The rate of demand is hard to determine unless one relies on the number of sales in respect to the fact that goods supplied are the goods demanded in the market. An assumption is that the rate used in computing the EOQ is not only known but also regular. The company determines the price of goods regarding to different market forces, which force companies to make different process especially if they are not monopolies. Assumption that the companies knew a constant price is mainly an assumption because of the consideration of market fluctuation throughout an operating year. The companies also have to assume that there is a prohibition on stock out. Another assumption is that the company delivers all bunches of goods at once and makes immediate replacement of the whole batch.

When determining EOQ, individuals have to consider some other factors in inventory management. One of the worlds' well-known economists Geoff Relph helped to illustrate this. According to Relph, there are three basic steps to proper inventory management. According to Geoff, inventory is any stored material that is useful to the company as either a raw material, work in progress or finished goods in store (Geoff et al., 2002, p.2). While storing inventories is necessary in a company, Geoff seeks to distinguish between storing stock and holding inventory. Holding inventory, involves intentionally reserving inventories that should be in the market, and waiting for a day the inventories prices will go up. Geoff identifies storing inventories as a necessity while holding inventories is a risk as not always do market behaviors do as expected. At times, the cost of inventories falls entirely as the inventories are on their way out of the market because of they are getting outdated in the modern world.

The first step is to control, to manage and the inventories through the process of acquiring the inventories. Currently this step needs the proper handling and embracing the current technology while doing so. There is a need to reduce manual intervention according to Geoff curve as it shows failure of planning and is proof that the company experienced a shortage of inventories. Manual intervention will mostly result to confusion in managing the inventories followed by massive mismatching of the inventories. After the mismatch, poor data system will follow and a confused ordering system which will lead to release of insufficient stock (Geoff et al., 2002, p.3). While controlling the inventories there needs to be caution as not all inventories fall in the same category, and some need proper attention in respect to their value. In an effort to control and plan, there is a necessity to educate any staff in the company to ensure proper handling of the inventories.

According to Geoff, another step in inventory management is the classification of inventory based on their utilization annually. This will involve having the former inventory records, and using them to classify what is valuable to the company according to the type of inventory the company requires. After that, the next step is to determine array in which to rate each category. This is crucial because different classes have different uses, and some are of less value but are crucial for either production or ordering. After this, the other, only option is to analyze the different classes, and put them to use according to the requirements.

CHAPTER 2: ANALYSIS of DATA

Prelude

In analyzing the data from the company, it is important to evaluate the customers, who are the sample in this case study. The Company is a dealer in most of the electrical devices; hence, it is a destination for many customers both inside and outside the country. The customers are the target of the data analysis since they provide a suitable sample for interviewing. Analyzing the data involves identifying the benefits that the company enjoys in relation to its competitors. This will always influence the prosperity of the company and hence the result in the case studies. The online ordering system put forward by the company helps in the efficient delivery of products to the customer. The local delivery system also allows the customer to put order and decide on the period over which they would like to receive the products. These two benefits have a considerable effect on the number of the customers, the companies are enjoying across the world; consequently, influencing their importing and the exporting abilities. In the analysis of data, it is also significant to study the structure of the company in relation to the management status. This will include the analysis of inventory management, safety stock, ABC analysis, EOQ and forecasting method that equally gives the shape of the company in the world (Chin et al., 2012, p. 294). Analyzing the data obtained from this structure is suitable in explaining why the company is one of the most successful electronic companies in the world. The data obtained from the market have effect on these five structures of the company.

1.

Analysis of the inventory management

As a business term, inventory management is a process whereby a company ensures that there is uninterrupted flow of units in and out of the business inventory (Cannella & Ciancimino 2010, p. 6657). In studying the inventory management of the company, interviewing the targeted sample was the main method of collecting the data. The Company preferred interviews because it provides efficiency during the study since the study was to cover a wide area of which giving out questionnaires could have been expensive. Observation would have not been efficient since the study needed firsthand information from the interviewees themselves.

Interviews done yielded the following result:

Category

Number of interviewees

Those thinking that the company has ineffective inventory management through their own judgment

1

Those thinking that the company has ineffective inventory management because of failure to deal with the customers demand

2

Those thinking that the company has ineffective inventory management because the customers demand are not constant.

3

(i) the proportion of SKUs to brands

The result from the interviewees shows that the company does not have an efficient inventory management to help in keeping the number of their customers. The company produces various products adding up to 60 brands and 15000 stock-keeping units (SKUs). The SKUs are the number of codes that the company uses in keeping track of all the stock because it makes each product to be different from each other. This explains why the company does not have an efficient control for their units since the number of SKU and the brand determine whether the company will be able to control the transfer of its units. According to the findings, the directing manager believe that the organization do not always have enough SKUs for the stock whenever they receive a customer order. This, according to the literature review, makes the company has a poor inventory management since without a balanced number of SKUs and the customer's order; it will always be difficult to control the movement of goods out and into the business (Chin et al., 2012, p. 294). Consequently, the business will not be able to meet the needs by the customers because of the high number of SKUs. The company should realize the importance of having adequate SKUs for the stock in order to keep track of every brand of product that is going out of business. This will help in the smooth running of the business.

(ii) Uncertainty in demand of customers

The company also has the problem of uncertainty in demand by the customer. This comes as the result of the slow moving product that makes the delivery to customers to slow down consequently leading to unmet desires of the customers. In balancing, the management of any company's inventory there is the need to deal with time. The time it takes in delivering the goods to the customer will determine the efficiency of managing the inventory. The company should be in a position to understand how long the supplier will take to process an order and they (company) should be ready to work on the order effectively (Chin et al., 2012, p. 294). This attribute cannot be evidenced in this company, because of inability to execute the orders place by the suppliers at the right time. An effective inventory management also requires the business to have knowledge about the time it will take for the transfer of the materials to meet the inventory. This is what will make the business know the exact time of placing an order and the number units that the company will need to order; consequently achieving a smoothly running system.

For the company to satisfy their customers, they always turn to the use of airfreights in transporting their products to customers to lower the time taken for the delivery. This turns to be expensive on the side of the company since they will need much money to finance the operation of the airfreight. This makes the company to impose charge fees on the customers in order to reduce the cost effect of the airfreight. In order to uphold an upstanding image, the company will need to cover the fee charges thereby increasing the cost of the airfreight, which in turn lowers the profit made by the company.

(iii) Failure of buffer for stock

It is also worth noting that the company does not always use inventory as a buffer for their stocks. This is due to the fear of MD in of storing the inventory in the warehouse. This could lead the company in going through many problems resulting from the location. The cash flow of the company cannot allow it to secure much of their inventory in the warehouse since it did not plan for such expenses. They would rather invest in other project than keep buffer stock something, which is against the proper inventory management. Another problem, which does not allow the company to store the excess stock, is the cost of increased storage in the warehouses. This is because a higher inventory levels than usual will always make them pay more insurance costs. The MD feared the calculation of the buffer stock would have increased the spending of the company hence losses (Morlidge & Player, 2010, p. 7). According to the literature review, to manage the inventory, a company also needs to calculate the buffer stock, which is the additional units that arise over the minimum number of units required in the production. This always makes a company maintain their production levels thereby avoiding problems related to uncertainties. The manager will take the unit above the production level and keep for future shortages. The shortages arise in subsequent production, for example, repairing a defective part of a machine. This opposes the principle of the company that only allows it to accumulate just enough inventories with no excess of the buffer stock.

In order to solve this problem, the company will need to find ways to buffer their stock through sorting to cheap warehouses where they can reduce the cost of storing their stock. In order to reduce the cost associated with storage in the silo, the company can build their own private warehouse, which is effective for a big company dealing in exports and imports. The managing director should also be ready to take the risk in calculating the buffer stock because that is the art of managing a business.

(iv) Limiting inventory management

The company also limits their inventory management to documenting materials and movement of the materials during the company's operations. This makes the company to have a poor inventory management since balanced inventory requires the presence of the management, as they go through the various stages. Therefore, the company lacks the work in progress inventory that helps in keeping track of the progress associated with producing a finished product.

In order to solve this, company will need to ensure that they have managed the products at the different stages before they reach the final stage where they become finished goods. This help in keeping track of any unintended shortage that may occur as applied in progress inventory.

(v) Failure to keep accurate records

According to the literature review, balanced inventory management also advocates for keeping accurate records of final products, which need shipment. This is indifferent to the company, which have difficulty of maintaining accurate records of goods shipped. The following graph illustrates the demand for the product X and Y in the business that gives a reason why the company is not able to keep accurate records.

The graph shows that the company's product classified neither as cyclic nor seasonal. The outstanding characteristics of the company are the fluctuation in the rate of demand showing a series of increase and decrease at the different intervals of the year. The fluctuation explains the difficulty the company counters whenever they need to keep accurate records in the company.

On its own, the company cannot control the fluctuation because the customers may sometimes need a larger number of a particular item. The suppliers also make the company witness a fluctuation in the number of the product when they missed some raw material in producing some items. Generally, these fluctuations always make it difficult for the business to establish and maintain an accurate record. This lowers the inventory management of the company since it does not maintain accurate figures for their finished products; consequently, it cannot be able to give information to the sales personnel on what amount will be available for shipment.

The company should sacrifice some money to help it in establishing a constant production in their operation through ensuring that they maintain their customers and their suppliers. The company can achieve this by ensuring that they have maintained constant prices of their products and the prices of which they take the raw materials from the suppliers.

(vi) Fear of stock shortage

Moreover, the company also fears the provision of free items to their potential customers because of the consequences they relate to stock shortage. They always offer a promotional reward, whereby the customers must first buy the product is when they will offer an award. This lessens the inventory management, according to the literature review, since the latter always depends on the relationship that the company builds up with customers. The customers always affect the transfer of products in and out of the business hence their demand and taste influence the inventory management of the business. In order to solve this problem, the company should put forward promotional strategies such as offering free products to the customer that always attracts the customers into buying the product from the company (Huang, 2011, p. 1230).

2.

Analysis of the forecasting method

Business forecasting is significant for every business organization that would like to thrive in the competitive world. It helps the business in predicting the future trends in the market and consequently determines the proper ways of preparing towards the trends (Sridhar et al., 2011, p. 140). The company does not have any forecasting method apart from the safety stock method, which they use in projecting the future. They use this method for both short- and long-term although they may also use the technique of comparing one month to the other to realize the emerging trends. They do this to the long-term forecasting by using the happenings in a year to predict what will happen in the subsequent years. They majorly depend on looking at the present patterns to predict on the future patterns; consequently, the company has a heavy reliance on the assumption. The reliance on assumption makes the company miss better business forecasting since there are always dynamics, which occurs in the operation of a company.

According to the literature review, every organization needs several forecasting tools in order to determine the future of the companies. Some of the tools used in forecasting are electronic spreadsheets, enterprise resource planning and electronic data interchange (Eusepi & Preston 2011, p. 2850). Indifferent to the findings related to business, business forecasting always involve the use of web tools in identifying the key factors in production, which will then give projection of what will happen in the future.

The company should shun the use of assumption in predicting the future because there is dynamism that occurs in the course of a company's operation (Eusepi & Preston 2011, p. 2850). For instance, the amount of profit the company realizes from its production always differ from one season to another due to the fluctuation in demand of their product as shown by the graph (graph showing demand for product X and Y). The falling of demand arises from the inevitable increase of prices by the company making more of the potential customers run away from buying the product. In another situation, the supply of the raw material by the suppliers also goes down in the company thus negatively affecting the production of the company. At some time, the prices the companies offer to the suppliers tend to discourage them. These shows the various fluctuations in this company's operation making the method of safety stock be ineffective (Li et al. 2012, p. 182). The assumption by the managing director, that because the increase this year was from 10 to 20% means that every year would also have the increase of the production from 10 to 20%, is wrong since at other times the company will witness a fall in their production as illustrated. In the real sense, patterns are not always the right way of predicting the future because everything in the world tends to change.

The only solution to the company is to adopt the use of the modern tools used in forecasting especially the internet that will help in several ways. The internet provides a variety of tools that aid in forecasting without depending on the trends (Li et al. 2012, p. 182). Internet acts as a multipurpose since the business can use it (internet) to construct models that they feel will suit them in making predictions. The internet is the modern emerging trend in the age of business; consequently, will help the business in making appropriate transformation in alignment with the technological market. Through the internet, the business forecasters always get their work made easier since every trend of business is accessible in the internet.

The safety stock is of significant value to the company since it is the best way to foresee the future stipulation of the organization. In doing this, they are better positioned to tell where they stand at the end of the financial year. Using the safety stock, the company can determine where any inventory shortages may develop (Vona, 2011, p. 247). For the company to be in a better position, on the highly competitive market it has to maintain an adequate amount of their current stock. This is an added advantage for the company in relation to bond with its customers (Vona, 2011, p. 247). The customers' interest comes first so it is shameful to have buyers requesting for products the company does not have on their stock at hand.

The company having adequate stock at hand avoids order fluctuations; thus, it increases satisfaction of the organizations buyers. In some cases, the company may face challenges of shortages on stock levels that result from poor calculations of safety stock intensity. Such cases result from lack of monitoring the flow of outgoing products. These effects have a significant impact in the succession of the company. Assigning someone the responsibility of monitoring the stock or alternatively increasing the number of times stocktaking happens to help avoid the effect on the company (Gudehus, 2012, p. 295).

There are three key factors put into consideration by the company under safety stocks. The first and considered the most important of the three is lead-time. Their suppliers come from different locations of the continent (Shah, 2009, p. 101). The different suppliers have different duration for delivery of their products to the company. Other than the duration of delivery, there is the manufacturing period. This is the time taken by the supplier to process the product before shipping it to the company. In summary, lead-time is the period for product processing plus the duration that the inventory takes to get to the company (Shah, 2009, p. 101).

A bulky order, therefore, will have to take longer lead-time in relation to its quantity as compared to smaller orders that will require little time to process. Lead-time relies on a variety of factors that need consideration. For instance, a supplier cannot manufacture a product until the company makes an order. Most suppliers prefer doing it that way since they may produce goods in excess then they lack buyers (Shah, 2009, p. 101). Accordingly, for manufacturing of most products it takes duration of roughly thirty to forty five days to complete processing. Preparation of documents for the shipping of the products tends to last another week. After the documents are ready, the product takes a week to get to Thailand. Since the transportation is by sea, it takes a week from China to Taiwan. From Taiwan, it takes another additional two weeks getting to Europe. By the time it gets to Thailand, the inventory takes around one month (Shah, 2009, p. 101).

On getting to Thailand port, the company has its own outsource, service providers assigned the responsibility of checking the inventory quality. They are supposed to deal with the goods import tax at the port. At the port, the imported goods tend to take at least one week in the checking and clearing processes (Shah, 2009, p. 101). To sum up the duration when the company places an order until receiving it is approximately two months for China and Taiwan and for suppliers in Europe it takes three months.

Second on the list of prime factors considered by the company is holiday. Holidays on supplier countries affect lead-time. Looking at the company's leading supplier; Taiwan and China, they have extended holidays during the Chinese New Year for every year. The Chinese New Year lasts for more than two consecutive weeks of the month of February. Over this period of two weeks, the suppliers are not working since they are on holiday. Stopping all production processes and manufacturing have an effect on lead-time (Shah, 2009, p. 101). Another clear example is around Thanks giving holidays in November, Christmas and New Year holidays during December in Europe. At this period, the manufacturing companies stop all their production processes for they are on holiday.

With the challenges faced during this period, the company considers holidays as another key factor that highly affects the stocks level. The effects affect the company largely, and if not well monitored they can cause the company absolute disgrace to its customers satisfaction. The Company's administrators, shareholders and employees feel these effects. To overcome these challenges facing the well-being of the company, they place orders for products about a month in advance before the suppliers' holiday phase (Gudehus, 2012, p. 295). The orders requested come more than the usual in term of quantity. With these measures taken, the company is safe from suffering lack of stock at such situations.

The third and last factor considered by the company in safety stock is the purchasing price. This is the outlet price of the goods by suppliers and the company. In this factor, there is an agreement that the suppliers have to inform the company in advance, like at least a month before adjusting the prices. This way they orders a large stock that can sustain it for the next six months that prices will be at an increased rate (Bragg, 2011, p. 157). The company could order for more than that six months stock, but it has limited space for storage at the warehouse. It has to incur extra expenses on hiring an additional warehouse to store the inventories. The company is at a better position renting a warehouse for storage than getting the products after increasing the prices.

Using records from historical demand of the products, the company calculates the safety stock the phase when they have to avoid derailing factors from their suppliers. In most cases, the demand for every item the company sales are never constant, so they do calculation relating to the last twelve months (Vona, 2011, p. 247). They do a combination of three consecutive months and the highest figure resulted considered as the safest level of stock for ordering by the company. For instance, they combine January, February plus March then the sum results to be the order. An amalgamation of three months is that it is the approximated lead-time for an inventory (Bragg, 2011, p. 157). The moment the company results to the maximum, they use the number for safety stock, a deduction made from the closing inventory balance for them to come to the quantity they need to order.

If, by any chance, the safety stock calculated turn out negative then it means that the closing inventory is most likely more than the safety stock. In this case, the company does not place an order. If the results turn out to be positive, then it is up to the company to make an order for more products needed for the required stock level. During the period when the economy weakens, the company cuts down the number of months that for making safety stocks orders from three to two months (Bragg, 2011, p. 157). This is because the rate at which the company is selling its products is low in comparison to other periods. During these difficult economic times, ordering three months safety sock is unreliable to the company.

The company used data on historical requirements for calculation of orders for safety stock. In a situation where the total sale encounters fluctuations, the firm does not use those demands for consideration. A compelling example is, as customers have demanded projects that will lead to an increase in sales. For this case, there is no inclusion of that month in the calculation of a safety stock. The inclusion of such a month will cause misleading results on calculation of safety stock causing an increased amount of safety stock (Hill, 2012, p. 307). The effects encountered are holding many inventories at hand that in the end because the company costs for storage.

The company does calculations of safety stock monthly and for every single product. Classifications of the products are in groups of similar characteristics. The purchasing manager does calculations manually for every single inventory always. From this point, the assistant to managing director assesses the structure of the safety stock before the company makes any orders and he have the potential of making other changes if needed. The deputy-managing director rounds up the figures to the nearest ten. They need to make adjustments after estimation of safety stocks for a number of reasons (Hill, 2012, p. 307). One, most suppliers have a limitation of the minimal quantity of an order made by companies. In this situation, the company has to increase their numbers if less than the minimal requirement to purchase more inventory.

Secondly, the sizes of the carton boxes used for packaging, suppliers demand that the company make orders that fit the carrying capacity of the carton boxes used for packaging. The numbers of items packed have to fit perfectly inside the carton boxes to avoid cases whereby a half packed carton reaching the company with a lesser number of items (Gudehus, 2012, p. 295). The power to adjust safety stock structure lies on the decision by the deputy-managing director. Principles, policies or techniques for calculating safety stock levels have not yet been resolved.

ABC Analysis

The company ABC Analysis classify inventory into various groups. The application of the ABC analysis and other techniques facilitate the comparison of the literature review with other data analysis. The company has more than 60 brands and more than 15,000 Stock-keeping units also abbreviated as SKUs (Anil et al., 2010, p.120). The company has one type of product, which comes in different number of sizes, colors and features it is necessary to analyze the product in ABC. The company has each of its products at different demand. Each one of the product type, there is own determinable demand for different size. However, there is identical product but one size is the best selling while another size is slow moving products. The classification of the company's inventory into ABC derives some complication due to the. Reflection of the company shows evidence of a complex process in the analysis of each item individually every month.

The company contends that it is time wasting, in addition to being extremely costly, to analyze item by item every month. However, this method is, but it is more effectual than analyze item as a group (Anil et al., 2010, p. 110). The company cannot sort items into a group or any class. In this case, it will need to consider differently as each product has different demand, which we have to regard each item independently. In this case, the Inventory is essentially running the evaluation of the quantity. The inventory is necessary classify some logic and to be able to manage the same. Recollecting from most of the organizations, the management sorts out the inventory according to ABC; moreover, this classification method bases on Pareto codes.

Item

Annual employed in No. Units

Unit charge

Amount used in Dollars

Percentage of full amount Dollar Usage

1

5,000

1.50

7,500

2.9%

2

1,500

8.00

12,000

4.7%

3

10,000

10.50

105,000

41.2%

4

6,000

2.00

12,000

4.7%

5

7,500

0.50

3,750

1.5%

6

6,000

13.60

81,000

32.0%

7

5,000

0.75

3,750

1.5%

8

4,500

1.25

5,625

2.2%

9

7,000

2.50

17,500

6.9%

10

3,000

2.00

6,000

2.4%

Total

$254,725

An individual classifies the inventory basing on the worth of the price units of the electrical products. The categorization of the company's brands into groups is important. The brands are, however, wide in terms of the variety. This runs up to more than 60 brands of product and has more than 15,000 SKU (Ross, 2009, p.150). "A" group Items include 20% of SKU & correspond to 80% of $ spend.