Inventory management is something that does not sound that difficult to manage but it is one of the most crucial processes a business, whether small or big, needs to worry about. There has to be an optimum point where a firm can know when and how much to order. Many people think that they can order too much in advance and avoid shipping cost but this would be a bad decision for the business. What people do not realize is that sometimes the storage cost of the inventory far exceeds the shipping cost.
So what happens when a firm orders too little? The biggest problem most firms face is inadequate inventory to fulfill consumer demand. A big business can lose a huge order if they do not have inventory to fulfill the requirements where has a small business such as a small retail store can lose a customer if they do not have enough inventory. Economic Order Quantity helps businesses find the optimum level where they can order at the lowest cost.
This is extremely important because inventory is an asset on the balance sheets and also appears on the income statement. Like the professor said, it’s better to hold more assets in cash than in inventory. There have been many instances where I walked into a store and walked out disappointed just because what I wanted was not in stock. Some businesses can get affected by it but some don’t. For example, I walked into Dunkin Donuts and ordered an egg and cheese on a croissant but the employee told me they were out of croissants. It did not keep me from going there next time. On the other hand, a store that I went into for the first time did not have a size in a dress that I had liked. They were even out of the size for my second option. I remember that I did not go to that store again.
One company that I think would consider inventory management as one of their most crucial processes would be Wal-Mart. A store which has such a high turnover would need extremely efficient inventory management techniques. Wal-Mart follows JIT process because they do not like to hold inventory and like to avoid backorders. A company has to be quick and efficient to manage JIT effectively. I have never had inventory issues when I have walked into Wal-Mart.The link to an article below talks about their zero-tolerance policy on late shipments and their JIT process of inventory management.
Inventory management is extremely important and something we all should remember when or if we are running our own or even someone else’s business. Have you ever been disappointed because of poor inventory management?
Forecast is something we revolve around on a daily basis. It is around us so much, that sometimes we forget how big of a role forecasts play in our lives. For example, a weather forecast could mean very little to an individual before he/she steps outside the house however, on the other hand it could mean a lot to a company who has spent over $100,000 to organize an outdoor event.
When we look at a specific trend in the market, we will predict the future. This prediction leads to a forecast. In most cases forecasts are far from what actually takes place however, in some cases they are accurate and close to accurate.
I believe that forecasts should be done considering all the factors. It does not always have to be positive which is why being too optimistic about the future can cause problems for a company. I worked for a retail company last year where some important decisions were made based on forecasts. One of such decisions included how many people to schedule for work on a particular day. For example if the sales on Saturday were forecasted to be high then more employees were called that day to work but on the other hand if sales were forecasted to be low, less employees would be working. An advantage of that for the company was saving cost however, the biggest drawback was that forecasts are not always accurate. On a Monday, they forecasted fewer sales and only a few employees were working but more customers showed up and it got difficult to manage for those few employees.
Companies make daily decisions based on forecasts. These would include how much inventory should be kept, how many employees should be hired. These decisions are more crucial than they appear. If the company is not prepared for the “what if’s”, then they are at big disadvantage, especially if they are in a competitive environment.
We are living in a technological world where forecasts play a huge role however, with the high advancement in technology, things are more unpredictable than they seem and the forecasts tend not to be very accurate. For example an article on www.bloomberg.com , “HTC Cuts Sales Forecast on Competition from Apple, Samsung”, talks about how the sales forecast had to be changed, in this case lowered, because Apple and Samsung had growing sales and had forecasted higher growth. Like I mentioned earlier we live in a world of forecasts. One forecast is based on another. In this case, HTC’s sales forecast was affected by the sales forecast of Apple and Samsung.
The question I would like to ask you is, have you ever been in one or more situations where you based a decision on an inaccurate forecast? How did it affect you?
Above article taken from http://www.bloomberg.com/news/2011-11-23/htc-cuts-sales-forecast-on-competition-from-apple-samsung-1-.html