Order 1253048: Assignment 1

Assignment: Option 2

Prepare a 5-6 page report (excluding the cover page, the reference page, and any tables and graphs), which describes the uses of business inventory control. You need to include at least one real world example and apply at least one inventory control method discussed in Chapter 6. Please use a flow chart to present your final findings. You may use hypothetical numbers to illustrate your analysis if you cannot find the actual data. However, you have to use some number to demonstrate your ability to apply your chosen inventory control model to a real world situation. APA format and appropriate use of section headings are required. Please copy, paste and explain your results in your paper, AND attach your Excel Worksheet, which is a must to receive credits for statistical analysis. You do need to analyze your own data and cannot simply cite the statistical result published elsewhere.

Notes: Business Inventory Control Models

Cat James 21.10.2018

Inventory:

· Asset

· Invested capital

· Too low = unable to meet demand and stockouts which may lead to a loss of business or customers

· Too high = costs associated with storage (insurance, rent) and handling (wages, taxes, theft), tied up asset

· Balance crucial to success, need to have enough inventory to meet demand or future needs but not too much that cannot be moved due to associated costs

· (Render, Stair, Hanna, & Hale, 188-191)

Costs associated with inventory

· Materials / purchase

· Ordering

· Storage (holding costs) and handling

· Stockouts (outages, normally frequently)

· (Render, Stair, Hanna, & Hale, 190)

Inventory controls are set to balance inventory in stock and demand in the most economically manner that meats the needs of the company or industry

· Need to restock or order inventory to operate (reorder point)

· Quantity and timing are crucial to avoiding overhead costs but maintaining demand

· Observations, no reference

3 main models for inventory control

· Economic Ordering Quantity (EOQ)

· ABC Analysis

· Material Requirement Planning

· (Render, Stair, Hanna, & Hale, 223)

· The models are all types of Deterministic Models

· No uncertainty

· Costs, quantity, and processing time are known for demand and inventory stocking

· (Sinha, 2016)

EOQ

· A model to determine how much inventory to order to reduce total inventory costs while still maintaining demands but reduce total inventory cost

· Can also assist with timing of reordering and reserve inventory or stocking

· Major dependencies or assumptions:

o Demand is known in advance instead of having a degree of certainty

o Cost of materials and use of profit remains constant

o Inventory is reordered the moment it reaches zero with no delays in lead time or lag time in shipping or processing

· (Sinha, 2016)

· Demand must be constant year over year

· EOQ is point where demand is met at lowest cost

o Also called optimal number of pieces to order (Q*)

o Total cost = cost of materials or purchase + cost of ordering + cost of holding

· EOQ = Square root of (2DC₀ / Ch)

o D: annual demand or quantity

o C₀: Ordering cost per order

o Ch: annual holding cost per unit

· Can be used in alternate format to calculate annual ordering and holding costs

· (Render, Stair, Hanna, & Hale, 223)

· Pro

o Restocking streamlined and smooth

o Stock or inventory on hand to fulfill demand

o Easy to run in excel to make up for complicated mathematical equations

· Weakness

o See above assumptions

o Does not account for inflation or shortages

o Depending on industry, additional calculations may be needed

o Cannot combine products in calculations

· (Nurjaman & Wulan, 30020-4)

ABC Analysis

· A model of inventory analysis that divides inventory into 3 categories based on importance with Group A being the most important and Group C being the least important (when compared to the other 2 groups).

· Importance is measured by cost

· Group A has the most cost associated with inventory and normally accounts for 70% of a company’s budget.

o Greater opportunity to monitor inventory to save cost (holding, storage, rent,) and gain profit

o Quantitative analysis and inventory control measures commonly used

· Group B accounts for 20% of dollar usage

o Middle range products

o May or may not have quantitative analysis and inventory control measures

· Group C accounts for 10% of dollar usage and would normally not have quantitative analysis or inventory control measures used beyond simple inventory processes

· (Render, Stair, Hanna, & Hale, 216-217)

· Activity-Based Costing or ABC Analysis

· Used to manage costs

· Every company or business can benefit from cutting costs

· Employees and managers are resources that companies can use to maximize potential, i.e. get the biggest bang for your buck

· ABC Analysis assists in organizing employee work distribution and manager focus

· Activity over Individual

· Management to determine if cost inline with purpose or set goals

· Can view quantities ordered in the past and current demand

· Also allows material consumption to be measured

o Difference between materials and consumption of materials vs. output

· Economy becoming more global and leading to an increase in demand but also in completion

· ABC Analysis can assist in the innovation of inventory systems and management oversight

· (Kampf, Lorincova, Hitka, & Caha, 120-124)

o note, may need to change to Kampf et. al. after first reference in paragraph.

Material Requirement Planning

· Dependent demand

· Allows for interdependency in demand of items that are elated or serve a related function

· Pros

o Greater efficiency in inventory and planning which leads to reduced inventory cost and higher customer service satisfaction

o Faster adaptation to market changes and fluctuations

o Inventory levels adjust without negatively impacting customer satisfaction indicators

· Cons:

o Complex if not using a computerized system

· Material Structure Tree

· Identify components of products and needed quantities then calculate the associated material requirements

· Divided into 3 levels: Level 0; Level 1; and Level 2.

· As the quantity for Level 0 increases, the quantities of Level 1 and Level 2 products increase as well since they make up Level 0 when put together.

· Can show more then one product at a time

· (Render, Stair, Hanna, & Hale, 216-221)

Thoughts after researching:

· Inventory is about more than just having the products available when demand is present.

· It includes addressing holding costs, storage, insurance, rent, theft, handling, delivery, and taxes.

· Spoilage can also be a concern depending on the industry and product

· If inventory is kept to high, additional holding costs would occur along with an increased risk of theft or spoilage.

· If inventory is kept to low, demand would not be meet or there could be long delays in delivery which could lead to a decrease in customer satisfaction or loss of business.

· Inventory controls vary depending on business need and industry

· Finding the right balance involve minimizing cost while still having enough inventory to meet demand in a timely manner

· Increasing shifts to a global economy increases competition and pressure on business to have inventory to meet demand in “real time”

· Observations, no reference except what was outlined above