Inventory management
As Wooden Wonders Ltd, adopting a good model of inventory management would optimize inventory order quantity and re-order level for the company. It is known that inventory plays a very important role in the supply chain. With a good model, the need for inventory would be minimized since the model is supposed to manage the factors that make inventory levels to go up. The items that require inventory are split in two main categories. The first is dependent demand items while the second is independent demand items. The systems required to manage these two categories vary.
Wooden Wonders, which manufactures household furniture, mainly deals with dependent demand items. This therefore requires an inventory management model that creates opportunities for cost saving in the company. The most practical model that the company can adopt for this purpose is the Economic Order Quantity model. This model helps in reducing the annual cost for ordering and holding the company’s items. The model is based on assumptions but also helps to show how reasonable order quantities are.
With the Economic Order Quantity model, there is the creation of a perpetual system of replenishment. With this system in place, it is possible to check if the level of withdrawal can cause the level of inventory to drop lower than the level of restocking. The model however can be modified to fit various situations and business environments depending on the category of inventory item. The estimates for the Economic Order Quantity can even be achieved graphically creating the proper opportunity for monitoring the order quantity and reorder levels for the company.
When the holding cost and the ordering cost are summed together and found to be at minimum, the economic order quantity is determined. This is also the formula used to determine the total cost. All the Economic Order Quantity models which are relevant for the Wooden Wonders would include; the model for demand uncertainty, the model for delivery and demand uncertainty, echelon inventory economic order quantity model, and the model of safety stock for tools inventory.
The model for demand uncertainty is useful in a case demand fails to be constant but keeps on varying. In such a case there is need to the company from a possible stock out and this can be achieved by holding an additional inventory. In such a case the reorder point has got to increase in order for the protection against variation to be achieved. The other model of delivery and demand uncertainty is used whenever there is uncertainty in both delivery and demand.
There can also be a case when the safety stock is included to accommodate variation. In this case, the safety stock amounts leads to an increased average inventory. For the echelon inventory model, it can be used in a case where the ownership of the supply chain is by partnerships of supplier or by one firm. All the members in the supply chain have to operate as one and therefore information regarding the inventory is shared among all of them.
Advantages and disadvantages of holding inventory
The main advantage for Wooden Wonder to hold inventory is so as to ensure that the demands for the customers are met on time. If a company is able to satisfy the demands of its customers on time, then customers will be happy with the services of the company and maintain good relations. The company will also have an increased customer base as a result of being able to make its customers happy. The other implication that comes as a result of meeting the demands of the customer is increased sales and hence increased profits.
There are times when the inventory can experience shortage. When such cases happen frequently, the customers will fail to be satisfied with the company and the services that they are provided with. In order to avoid such instances from happening at Wooden Wonders, there is need to hold inventory on regular basis. Bearing in mind that the products of this company are sold in across Europe and in the UK, the customers who rely on the products have to feel the satisfaction with the services. Cases of inventory shortages can be can create an internal crisis especially when the demand is very high the deliveries are required to be made urgently.
The other advantage that comes with holding company inventory is that it creates opportunities to benefit from quantity discount. Most suppliers give their customers discount for goods bought in large quantity. However, in order to save cost effectively, there is need to create a balance between the higher storage cost and a high risk of damage. This is the large cost incurred when it comes to financing inventory levels. With the appropriate model of inventory management, the cost can be reduced and save the company from unnecessary costs.
Holding inventory is also necessary in protecting the company from increases in prices. Wooden Wonders as a company supplies goods against quoted prices. Because of this, if inventory is not held, then the company risks the potential of an increase in prices in the future. But holding an inventory would prevent such a case from happening by hedging any possibility of an increase in prices. The market in which the company, Wooden Wonders, operates in is full of fluctuations and uncertainties. This mainly occurs as a result of the irregularities that with supply and demand in the market. There are seasons when the supply and demand ratio drops while in other seasons supply and demand gets high. Holding an inventory is very beneficial with such markets that have fluctuations and uncertainties. Storing of inventories will create a reduction of the uncertainties that accompany the fluctuations of the market.
Time is also an important aspect of holding an inventory. There is usually a lot of time that lags in the process of supply chain. It is therefore important that an inventory is maintained at every lead time. Inventory holding also helps to establish the inventory turnover. Just by keeping stock of the goods produced. It is possible to note the items that have high turnover as well as the items with low turnover. The items with high turnover, do not remain in the stock for a long times where as the ones with low turnover remain in the stock for quite some time.
Keeping an inventory helps with good decision making relating to ordering of goods. Most inventory policies are based on how much is required to make an order and when is the appropriate time for making the order.
Despite the many benefits that accompany holding inventory, there are also disadvantages that come with it. The main disadvantage is that holding an inventory may be costly to the extent that a company can fail to enjoy its full potential of profits. The disadvantage mainly comes due to holding too much inventory. Storage cost can be very high. When the items are held for a long time, chances are high that they may lose their value and begin to depreciate. Such a case can be caused by changes in fashion of specific items in the market .
There are industries that experience high changes and if inventory is held for a long time, then such items can be devalued within a very short time. Maintenance would also be very high and incur unnecessary cost to the company. Storage space is essential and there is need to create room for new products that are manufactured. This therefore means that it is important to establish the items with high inventory turnover since they do not take a long time in the storage and hence reduce certain costs incurred with holding inventory for a long time.
Alternative methods of inventory management
In inventory management, the central objective is to ensure that the cost of inventory is kept to the minimum as much as possible. This is when a company will eventually feel no need of inventory, when the cost is reduced. There are several elements or main factors that have to be managed in order to ensure that the cost of inventory is reduced. These factors include: storage cost, ordering cost, and stock out cost. The alternative methods used in inventory management involve modified models that ensure cost of inventory is reduced.
There are mainly two commonly used models; the fixed order quantity system and the replenishing system. Under the replenishing system, the amount that is ordered is usually not a fixed amount. However the only factors that are fixed in this system include maximum level of stock and the ordering time of all the items. The stock is reviewed frequently and on regular basis. The lead time of any item is one of the basis upon which the decision of the amount of items ordered is made. The others include the level of maximum stock and the quantity of stock that is held at the time of the review.
The second alternative method is also the proposed model for adoption by the company. It is the fixed order quantity system. Unlike the replenishing system, the fixed order quantity system has fixed order quantities. In order to make a reorder, a specific quantity level has to be attained first. This level is commonly referred to as the reorder level. This level is usually fixed and it is determined by the average consumption within a lead time. Determining a fixed quantity required for ordering can be established using ideas and concepts borrowed from the economic order quantity. This is because the economic order quantity is designed in a manner that guarantees lowering of the inventory cost.
Since economic order quantity is very essential in reducing inventory cost, there are methods that can be applied and help achieving this objective of inventory management. The three main methods include: graphical, tabular and algebraic method. In algebraic method, there are two main factors involved in calculation of the economic order quantity. This includes the storage coast and the ordering cost. In order to minimize the inventory cost, then these factors have to be balanced appropriately using algebraic expressions. The tabular method is used when the supplier offers discounts to the items purchased. Whenever there is a variation in the prices of different quantity levels, the tabular method can be employed in order to determine the economy order quantity.
Based on the evaluation of the two alternative methods, the one most appropriate for preventing high cost of inventory or rather preventing a company from taking inventory at all is the latter. This is simply by the fact that the latter option involves the use of concepts and techniques of economic order quantity. It is very easy to monitor all the factors involved in reducing the need of keeping an inventory.
Personal reflection journal
Through the entire course I have also been able to develop important skills that are essential in the work environment. Research skills, time management, and organizational skills are just but the main ones learned. The course work involved a lot of research activities and the assignments required to be submitted within a set deadline. I therefore found myself organizing my schedule in order to all the requirements of the course within the set deadline.
Completing this assignment was not a smooth ride as I had to encounter a lot of challenges. However, everything was within manageable means. Finding the appropriate resource for computing this final report required a lot reading from various materials. The teaching strategy adopted for this course was also quite challenging since we were expected to play a substantial role in the learning process. Not everything was plainly provided to us. This made me go the extra mile and research for more information.
I have noticed a few mistakes that I did this time that made me experience the challenges. The major mistake is procrastination. I found myself unable to honor my schedule a few times and I had to reschedule. Because of this, next time I will try to improve and ensure I commit myself to my schedule and all the tasks on time. When completing this assignment I found it very easy to understand the concepts required to be learned in the course. I also had no problem in relating the concepts to the case in the assignment. I believe the main reason for this is the nature of the concepts. They are not too difficult to grasp considering the fact that there is an entry level of knowledge and experience required to the course.
However the some of the skills which are intended to be gained at the end of the course posed a little difficulty. Even though, I believe that I have performed to the best of my ability throughout the course. Comparing my previous personal evaluation with the current one, I believe that I have made a noticeable improvement. I also believe that I would perform extremely well in this assignment and possibly get an A grade.
References List
Bowersox, C., & Cooper. 2010. Supply Chain Logistics Management. New York:
McGraw-Hill.
Kieso, D., Warfield, T., & Weygandt, J. 2007. Intermediate Accounting. Canada: John
Wiley & Sons.
Simchi-Levi, K. 2008. Designing and Managing the Supply Chain: Concepts,
Strategies and Case Studies. New York: McGraw-Hil.
