Production Management Inventory Management Seismic

Production Management Inventory Management Seismic Testing is involved in the business of testing subterranean areas for the presence of oil and other minerals. In its business, it uses a highly specialized and very dangerous explosive to generate the subterranean sound ways that it interprets to determine what is underground in a specific area. Because the explosive it uses is so specialized and difficult to obtain, it keeps a large supply of the explosive on hand. This strategy involving maintaining a large inventory of the explosive is a costly one.

The costs associated with this storage will now be discussed. In addition, suggestions will be made on how Seismic Testing could reduce its costs. There are several costs associated with storing inventory. Schermerhorn (1997, p. 497) refers to these as holding costs and describes them as "the costs of storing and insuring the items in inventory against loss plus the opportunity cost of the funds tied up in inventory." For Seismic Testing, the first significant cost would be related to the facilities needed to store the explosives. Lockyer, Muhlemann, and Oakland (1988, p.

392) note that storing materials also includes a need to ensure they are stored safely. Considering the nature of the product, it can be assumed that it is dangerous and that precautions would have to be taken for it to be stored safely. This is likely to mean that the actual storage area would be more costly than for other types of materials. Maintenance would also be likely to be higher, since Seismic Testing would need to ensure that the facilities remain suitable for storing the product.

In addition, there would be likely to be labor and time costs involved, such as the time and cost of having the storage area and the explosives checked to ensure safety. As Schermerhorn noted, insurance of inventory is also a cost. In the case of the explosive, insurance might need to extend not only to insuring for loss of the product, but also insuring for damage to the facility and injury to personnel, since an explosion could potentially cause damages and injuries.

Finally, there is the opportunity cost, which refers to how the income tied up in the inventory could have been utilized. The best way for Seismic Testing to reduce its inventory costs would be to utilize a lot-by-lot ordering system. It is noted that the explosive is specialized and difficult to obtain. The difficulty could be reduced by entering an agreement with a supplier, where the supplier agrees to supply a certain amount of the explosive on an ongoing basis.

This would then be delivered and paid for on a lot-by-lot basis based on an agreed payment amount, rather than being delivered and paid for in bulk. The lot-by-lot delivery would reduce the opportunity cost, since Seismic Testing would be paying for the material as they need it, rather than far in advance. Seismic Testing would also reduce its storage costs, since it would not need to store large amounts of the explosive.

This would create cost savings because it would require a smaller storage area to maintain and would also.