Inventory Management - Essay Example

26th November Inventory Management The recent economic downturn called for adoption of strong measures by companies in order to control production and avoid increased cost of storing inventory. This is due to the decreased purchasing power of consumers across many countries in the world. Inventory management is an essential aspect that companies cannot overlook based on the fact that inventories are the major expense incurred during the operations of any organization. In this regard, it is prudent for managers to emulate effective systems of controlling their stock. In order to meet the demand of their customers, most businesses maintain an inventory system that ensures optimal inventory is maintained while at the same time tracking the movement of stock. Organizations that are product-oriented greatly value the concept of inventory control. For example, in order to enhance efficiency in their operations, manufacturers aim at having as little inventory as possible (Andrew and John 35).On the other hand distributors are focused at maintaining a certain amount of stock that meets the needs of their customers. This paper seeks to analyze various methods that Wooden Wonders Ltd can emulate in order to ensure that costs of ordering and holding inventories are minimal as well as ensuring that company inventories are sufficient and not surplus. Economic order quantity (EOQ) Economic order quantity entails the level of inventory that minimizes the ordering cost as well as the inventory holding costs. The model that was developed by Ford Harris in 1913, seeks to identify whether or not the inventory held by a company is reasonable. One of the major aspects of EOQ is that it is used if there is no change in demand for the product throughout the year. The model consists of fixed cost that does not change regardless of the quantity of the units ordered. In addition, the model consists of cost of each unit held. The key parameters that are considered in order to attain the optimal level of inventory are the cost price of each unit, total quantity of units demanded, storage and delivery costs of the products. Basically, the companies use EOQ to determine the quantity of the units that is satisfactorily to reduce the transportation, delivery, and purchase costs. Assumptions of EOQ One of the major assumptions of EOQ is that the rate of demand is spread evenly throughout the year and that the demand rate is known. Secondly, the model assumes that the purchase price of the units is constant (Tempelmeier16). Thirdly, it assumes that the lead time is fixed and only a single product is involved. Part-period balancing Part-period balancing is inventory management technique that aims at making the order cost to be as close as possible to entire carrying costs. This entails selecting and comparing various periods covered by the inventory. When using the part-period balancing, reorder point is determined by the lead time and the rate of demand (Kieso et al 56). Periodic review system In addition to economic order quantity, Wooden Wonders Ltd can also use periodic review system (PRS) in order to manage their inventory. PRS entails checking the inventory and reordering the diminishing units within a particular time interval. Companies using the periodic review system base their reordering units on the amount of inventories after review. One of the limitation that affects the effectiveness of the PRS is that the amount of the inventory is only determined after the review (Hax and Candea 18). On the other hand, the administrative cost associated with periodic review system is low since the inventory review is only done periodically. The formula below indicates the aspects that are involved in the periodic review system. Fixed order quantity model Fixed order quantity model entails ordering same quantity of products. For example, if a company sell paper clips in carton of 200 pieces, then customers who want to buy 135 paper clips will be forced to purchase the full carton of 200 paper clips. In order to ensure that customers purchase certain products in large volume, some companies package their products in certain quantities. Single period model Single period model is emulated by companies that deal with perishable products such as flowers and food. Under the single period model, the unsold inventory is not carried to another accounting period. One of the major aspects of this model is that it creates a balance between opportunity cost of having inadequate inventory and the costs of losing goodwill from royal customers (Sucky 29). Physical inventory Physical inventory entails physical counting of the all units in store. In order to have the accurate level of inventory and raw materials, companies seek the guidance of financial managers. To enhance the process of undertaking physical counting of their inventory, companies use various techniques that ensure the disruptions that exist during the physical counting of the stocks are avoided. For example, while some companies automize their counting systems others have adopted inventory control systems soft ware. In this way, the speed of physical inventory process is enhanced. Cycle count A cycle count involves counting a subset of the inventory, in any particular period. One of the major differences that exist between cycle counting and physical inventory is that in physical inventory all the units are counted (Hopp and Spearman 46). The key advantage of the cycle counts is that it is provides a basis of attaining accurate amount of the inventory that a company has. In the same way, it is less disruptive on the activities of the company since only a small amount of inventories are counted. In this regard, this method of stock control is used by companies that deal with items of high value and those with higher movement volume. Advantages of holding inventory Meeting customer demand Through maintenance of adequate stock, a company has the ability to meet the demand of its customers. It is worth to note that lack of products that customers regularly demand may result to low sales since it discourages repeat purchases. It is therefore vital for managers to ensure that the inventory is maintained at an appropriate level. One of the major implications that benefit a firm that holds a significant inventory is strong customer loyalty. Customers are more attracted to businesses that guarantee them on the availability of the products they regularly purchase. Saving money Suppliers that manages to sell their entire stock normally offers a better deal for instance in the form of quantity discounts. In this way, companies are able save money that would be spent when purchasing inventory in small quantities. In the same way, early purchases are cheap since the demand is usually not high. It is vital to note that as the demand of new products or existing products increases, suppliers increases their profits. Organizations that aim at maximising their profits and reduce their expenses should therefore purchase their products before the demand increases. Reduced order costs Companies hold inventory in order to reduce order costs. In most cases companies charge fixed transportation costs. This means that if a company purchases large volume of products the transportation costs are distributed on many units thus decreasing the ordering costs as well as the transportation costs. Efficient production runs Due to the stiff competition in the business arena, companies are emulating any measure to ensure that they maintain their customers. One of the strategies that companies are adopting is to ensure that adequate raw materials are maintained in order to ensure continuity of the production process. Holding of inventory is paramount in ensuring that there is no delay in the production of products that are highly demanded by the customers. The high demand of Toyota brands for example, is addressed by ensuring that the production facility of the company is effective. Capital gain Maintenance of inventory is advantageous to a company in that it ensures availability of products when they are demanded by the consumers. In the same way, a business attains a capital gain if the prices of the products increase. Large inventory also ensures that the risks associated with inadequate supply of products are avoided. Disadvantages of holding inventory High storage cost As the level of inventory increase the storage cots also increase. Other costs that a company undergoes when it increase the level of inventory include security costs as well the costs of purchasing insecticides that are required to protect the products from destruction by mice and rats. It is important for organizations to account for the storage costs before purchasing products in large quantities. Capital Cost Capital costs refer to loss of opportunities that a firm experiences when cash is tied up as a result of maintaining large volume of inventory. As businesses maintain inventory in order to meet the demand of their customers, large amount of cash is held in form of inventory thus limiting the ability of the company to finance other activities that are vital to increase the sales and profits. In the same way, by purchasing the inventory as stipulated by the balance sheet, a company does not consider changes that might affect the activities of a business and sales. Loss interest on cash during conversion If a company has adequate liquidity to purchase inventory that is held for a long duration of time, such cash does not earn interest leading to reduction of cash inflow of the company. It is important for financial managers to incorporate the costs of interest on the prices of their products. In the same way, it is imperative for companies to take into account the cost of bank financing if the inventory is acquired through financial resources from banks. Stock management In their efforts to reduce the holding costs, companies hire unskilled personnel to manage their inventory. As a result, various problems that affect the quality of the stock are not detected at the appropriate time. In case the problems were caused by the manufacturers, the long time taken to return the products to the manufacturers cause delays in the ordering process. Inventory risks By holding inventory, a company is exposed to a number of risks that results to loss of the stock. Some of the major risks that affect both perishable and non-perishable products include theft and spoilage. In the same way, if prices are reduced by the competitors, it may cause low sales of the company’s stock thus resulting to excess stock and high cost of maintaining the stock. Alternative methods of inventory management Just-in-time (JIT) Just-in-time (JIT) is one of the major alternatives of managing inventory for companies that do not aim at maintaining inventory. The philosophy is adopted by firms in order to have the lowest level of inventory (Hirano and Makota 28). One of the well known companies that use JIT is Toyota incorporation, a Japanese based motor vehicle manufacturer. JIT also entail production of products to meet the demand of a current customer. Benefits of JIT One of the major benefits of JIT is that it reduces the delay of the products from the manufacturers to the warehouses. Since JIT entails production of a product when demanded, in case there is no demand, the company does not make such a product leading to saving of company financial resources. Use of employees with diversified skills is another key merit of JIT. In this way, employees are able to work in the areas where they are more skilled thus leading to quality products. Material requirements planning (MRP) MRP is a computer based inventory management technique that aims at ensuring minimum stock of products with dependent demand. Just like JIT, material requirements planning adopt discrete ordering (Stevenson and William 35). This entails placing an order of what is demanded. It also involves undertaking regular checks on the quantities of product ordered by the customers. One of the major objectives of MRP is to ensure that adequate materials are available in the production facility. Secondly, it advocates for lowest possible products in the warehouse as well as low level of materials. Thirdly, it ensures effective planning of production activities and schedules. Problems associated with MRP MRP can be affected by the integrity of the data. For example, if an error occurs during receiving of inputs from the suppliers or customers, then the output will be erroneous. Other factors that affect the integrity of the data include errors in counting the supplier containers, system errors and errors in reporting process by the computer system. MRP system also makes it mandatory for the system users to be clear on the lead time. Based on the large volume of products manufactured by a company, it may not be possible to specify the time taken to produce an item. Conclusion Based on the above discussion, it is evident that Wooden Wonders Ltd has the chances of using various techniques of managing its inventory in order to ensure that its large number of customers that come from Europe and UK are effectively served. In order to ensure that the costs associated with holding of the inventory is maintained at a low level, it is significant for the company to adopt proper management of its inventory. Some of the major techniques that the company can adopt include economic order quantity, part-period balancing and single period model among others. From the above discussion it is also clear that firms that aim not to hold any inventory have the opportunity to utilize Just-in-time and material requirements planning One of the major strategy that the Wooden Wonders Ltd Company should adopt is the use of computer technology to control the level of the inventory and to determine the re order point. In this way, the losses that occur due to the delay in delivery and holding of excess surplus will be greatly addressed. Reflective journal 1. One of the major aspect that initiated by ability to successfully produce this course work was adequate studies that I did in order to have the know how of the various accounting aspects as outlined in the learning outcomes. In order to produce the course work, I was interested in doing research through the internet and other sources on the various techniques of managing the inventory. One of the factors that motivated me was the wide range of information that covers various aspects on inventory control. 2. One of the major problems I encountered is lack of adequate information on the alternative inventory techniques that makes company not to maintain inventory at all. I also did not find adequate real examples of companies using various stock control strategies covered by the assignment. The teaching strategies were quite effective and supportive in completion of my assignment. 3. One of the major aspects I would do next time is to compare the inventory management techniques adopted by companies within the same industry. This would be possible if the word limit is increased in order to cover more companies. In addition, I would extend my research in order to gather more and actual information that relate to various inventory control strategies of international companies such as Coca Cola, General Motors and Nokia. 4. The major learning outcome that I found to be easiest was the understanding of the various accounting techniques that relate to management accounting. This was based on the practical implications of the accounting techniques by major companies such as Toyota. .As a result, I was able to gather reasonable information on the implications of JIT technique on companies. 5. The major learning outcome that I found to be difficult was using the cost information to solve basic accounting problems aw well explaining and interpreting the information. 6. I honestly believe that I have done the assignment to the best of my ability despite the few challenges I encountered during the research. Works Cited Andrew, C and John, L. Economic Theory and the World of Practice: A Celebration of the (S,s) Model. Journal of Economic Perspectives Hirano, H and Makota, F. JIT Is Flow: Practice and Principles of Lean Manufacturing. New York: PCS Press, Inc, 2006. Kieso, D., Warfield, D., Weygandt, J. Intermediate Accounting. Canada: John Wiley & Sons, 2007. Hax, A and Candea, D. Production and Operations Management, Prentice-Hall, Englewood Cliffs, NJ, 1998. Hopp, W and Spearman, M. Commissioned Paper To Pull or Not to Pull: What Is the Question? Manufacturing & Service Operations Management. London: Sage, 2004. Stevenson and William J. Production Operations Management. Boston, MA: Irwin/McGraw-Hill, 2005. Sucky, E. Inventory Management in Supply Chains: A Bargaining Problem. International Journal of Production Economics 93/94: 253. 2010. Tempelmeier, H. Inventory Management in Supply Networks, Canada: John Wiley & Sons, 2011. Read More