How does a manufacturer benefit from the concept of economic-order quantity?
Economic Order Quantity refers to an optimal quantity of orders that reduces total variable costs essential to order and hold inventory. The benefit of EOQ attached to a manufacturer is that EOQ tends to lower inventory costs. A firm is bound to suffer if it has too much inventory. When a company has a too much inventory, it tends to hold obsolete inventory which lowers the inventory turnover ratio. If manufacturing firm has less inventory, on the other hand, then it is exposed to stock outs and loss of client goodwill. However, for the manufacturer to increase the firm’s annual turnovers, he or she has to minimise the expenses of ordering and holding inventory (Cárdenas-Barrón et al., 2014).
It is, therefore, a mandatory to have an existence of financial metrics in order to quantify the optimal quantity of inventory to order and store. Hence, the financial metric in question is the Economic Order Quantity and lowering order costs. The concept strives to address the importance of purchasing in bulk in fewer orders to take full benefits of discount bulk buy. Besides, it may identify more orders of fewer catalogues to lessen holding costs if they are greater, and ordering costs are cheap. Hence, the Economic order quantity is effective in reducing inventory costs on the manufacturer (Chitale & Gupta, 2014).
How does ordering a fixed amount of products or services affect the buyer?
When a company orders a fixed amount of products or services in its portfolio, it may have adverse effects on the buyers. In the case that the firm manufactures building materials, it may tend to affect the clients that demand vast quantities for these products. Additionally, the consumers tend to lower their purchasing power till they hear that the inventory is convenient to meet their demands. However, the buyers that demand lower quantities of products tend to buy the products as normal (Monczka et al., 2015).
Consumers tend to have a different decision order depending on the amount and variety chosen. Consumers will have fewer preferences for the companies that tend to have fixed purchase order for products or services. The reduction in demand for products and services will reduce manufacturing capacity. However, this fixed purchase order is a limitation of the production planning in materials management. The practice of a company to adopt a fixed purchase order system tend to lower the firm’s manufacturing capacity (Nia et al., 2014).
Why is important, in production planning, to understand how to prioritize and maximize the utilization of a company’s manufacturing capacity?
A firm needs to have a sound production plan to prioritize and maximize its manufacturing capabilities. Though, sound planning is a tedious process that discusses a diverse range of activities that ensure that materials are available in the places where they are demandable. An effective production plan tends to minimize labour costs by excluding wasted time and streamlining process flow. Additionally, comprehending manufacturing capacity assists to estimate potential sales with some reliability. The company can reach market goals by researching information from the market trends (Safa et al., 2012).
Understanding manufacturing capacity facilitates optimized equipment usage and increased capacity. Planning effectively opts to maximise operational capacity occasionally. This scenario makes the production planning appear as one that controls time and ensuring that it is well utilized and not create delays sometimes. Maximising manufacturing capacity lowers inventory costs by lowering the demand for safety stocks and excessive work-in-progress inventories. Effective inventory control ensures that feeding the pipeline have to be established, and a sound inventory system should be set. The production plan provides a platform to list the actual work and plans the particulars of day-to-day events (Teng & Pan, 2012).
References
Cárdenas-Barrón, L. E., Chung, K. J., & Treviño-Garza, G. (2014). Celebrating a century of the economic order quantity model in honor of Ford Whitman Harris. International Journal of Production Economics, 155, 1-7.
Chitale, A. K., & Gupta, R. C. (2014). MATERIALS MANAGEMENT A SUPPLY CHAIN PERSPECTIVE: TEXT AND CASES. PHI Learning Pvt. Ltd..
Monczka, R., Handfield, R., Giunipero, L., & Patterson, J. (2015). Purchasing and supply chain management. Cengage Learning.
Nia, A. R., Far, M. H., & Niaki, S. T. A. (2014). A fuzzy vendor managed inventory of multi-item economic order quantity model under shortage: An ant colony optimization algorithm. International Journal of Production Economics, 155, 259-271.
Safa, M., Shahi, A., Haas, C. T., & Hipel, K. W. (2014). Supplier selection process in an integrated construction materials management model. Automation in Construction, 48, 64-73.
Teng, J. T., Min, J., & Pan, Q. (2012). Economic order quantity model with trade credit financing for non-decreasing demand. Omega, 40(3), 328-335.
