Introduction
This paper discusses inventory management techniques used by firms. It also discusses techniques used by American Airlines to minimize costs and maximize profits.
Inventory management
Inventory management entails the processes and functions responsible for the maintenance, record keeping, reception and delivery of inventory and related products in any given business concern. The inventory management is one of the functions that any business organization should strategically address if is to achieve its profit maximization and costs minimization objectives. Inventory should be managed well so as to incur related management costs in the least way possible. Businesses employ different techniques and approaches in the management of inventory.
The latest approach currently employed is the just in time model of inventory management. Under the just in time (JIT) model, the organization only places supply orders fro the inventory that is set for use in the immediate consignment of production. This essentially reduces the overall inventory management costs. However, the model has its own flaws. For starters, it does not allow the organization adequate time for inspection and confirmation of the quality, quantity and precision of the consignment from the supply. It also exposes the production process to possible stops in the event the suppliers fail to meet the delivery deadlines.
Some organizations have embraced or retained the traditional inventory management processes in which the inventory are purchased or supplied prior to the actual production period. This enables the purchase and storage department adequate time to source for the most suitable inventory that meets the right qualitative and quantitative standards. The traditional mode provides the conveniences for inspection and confirmation of supplies. Finally, it facilitates continuity in the production process as it provides buffer stock that would be used in the event the ordered quantities have been exhausted and the next consignment has not arrived.
As such, the traditional approach to inventory management necessitates the calculation of safety stock levels, reorder point, economic order quantity and associated inventory management costs. The economic order quantity refers to the quantity of stock in terms of units to be purchased during an order. As such, it is calculated to strike a balance between the inventory management costs and the order costs. The formula of the economic order quantity is a function of the annual demand of inventory, the cost of placing an order and the unit cost of holding the inventory per annum.
Safety stock refers to the level of stock below which the organization needs to place an order. It gives the approximate lower limit if stock that the company can maintain but still be safe in terms of continuity in production. The formula for the safety stock is a function of the standard deviations of demand and the lead time. The demand refers to the annual requirement of the units of inventory while lead time refers to the period between the placement of the order and the actual delivery of the order. The formula for safety stock is as follows:
Safety stock = (Average lead time x standard deviation of demand)-2 + (Average demand x standard deviation of the lead time)-2
The reorder point refers to the point at which the organization should place an order. It is usually computed in the form of stock level. The formula for calculation of the reorder point is a function of the lead time demand and the safety stock. The lead time demand refers to the demand during the lead time. Reorder level = lead time demand + safety stock.
Techniques used by American Airlines to reduce costs and increase profits
The American Airlines employ different techniques in their bid to increase the profits and reduce the costs. They employ the use of efficient airplanes that guarantee low maintenance and fuel consumption. The maintenance department ensures the airplanes are fit and properly managed to prevent avoidable losses of fuel, plane damage and accidents. In addition, the airplanes are specially modified and adjusted to their areas of operations. That is the cargo planes are specifically designed in appreciation of their carriage roles as opposed to passenger airplanes.
The managements have also identified the employees as a main source of prosperity to the organizations. The labor relations management is conducted professionally and in appreciation of all the labor laws. The organizations retain their employees so as to cut on the losses incurred during orientation of new employees and the learning process. The company policies are shared with the employees and clients so as to develop an interactive platform that incorporates the ideas and suggestions by outsiders. The airlines also strictly confine themselves to their budgets so as to limit the possibilities of losses arising out of deviations. However, to retain and maintain the client base, the airlines usually undertake to provide alternative planes in cases where the schedules do not work as planned due to technicalities such as plane damage. Lastly, the airlines typically employ the use of efficient inventory management for the purposes of minimizing costs.
Works Cited
CNBC. (2010, September 29). Inside American Airlines MBAA 517. Retrieved September 26, 2012, from digital.films.com: http://digital.films.com/play/JJBBRE
Hansen, D. R., & Mowen, M. M. (2006). Managerial Accounting (8, illustrated ed.). London: Cengage Learning.
Weetman, P. (2006). Management Accounting (4, illustrated ed.). New York: Prentice Hall/Financial Times.
