In class, we participated in an activity where we had to estimate the amount of inventory that we needed in order to keep up with forecast demand. At first, our group was a little bit lost. Okay, A LOT a bit lost. After figuring it out, we fared well and ended up understanding the purpose of the activity.
This activity made me think of a night at an old job I used to have. I was asked to help take inventory of the items that were sitting outside, stock the shelves, and count and put whatever was extra into boxes to be loaded in our overhead shelving. Thinking this would be easy and a quick way to end my night, I happily agreed to do it.
I walked outside, ready to do as told and just stopped dead in my tracks. I didn’t want this task anymore and regretted taking it. There were two wide isles of carts packed with items. Apparently we must have really been doing well in sales, since we needed to stock ALL of this. So I grab the closest cart to me, pull it inside, and start stocking the product where it belonged. The space didn’t get filled, and I had no more of this particular product in any of the other carts. Clearly we didn’t order enough.
The second cart went the opposite way. I grabbed the cart of weed killer and went to the area to put everything on the shelf. This area was full, so I went to return the cart back outside. To my horror there wasn’t just this cart, but there were about twelve carts full of this weed killer. And it wasn’t even the season for weed killer…
This overstock happened with quite a few other items, as did the shortage of popular items. This was definitely an example of poor inventory management, and I’m curious as to exactly how much they spent on both holding costs and shortage costs. They may have saved on ordering costs on overstocked items, but will end up having to order more of that which they understocked. Someone added a couple extra zeroes to their weed killer order, and their inventory costs.
On the bright side, I can guarantee that their lawn will be weed free for the next ten years.
I thought the hardest part about this activity was predicting the reorder point. It was interesting to see how placing an order one week (and how much we ordered) impacted our supply and carrying cost two or even three weeks later. I agree with you that taking an inventory is no easy task and that is can often be hard to judge how much is needed. In your example, it does sound like the overstock was a result of poor inventory management and the person who originally took the inventory probably did not consider all the factors involved in keeping a future stock of inventoried items.
As a group 5 team member, I can relate. It can be very difficult to forecast the demand for various products and mistakes can be easily made. The lack of inventory management lead to your overstock and shortages. At my old high school job(worked in my school uniform store) we failed to order enough polo shirts and ended having to back order them a few days before school started! Like Kylee mentioned above, it is very interesting to see how placing orders can effect almost every aspect of your business, for better or worse.
I think having the correct amount of an item has to do with dumb luck to be honest. I was part of team one the winning team, and we messed up during the in class exercise to be honest. Although ordering a few items on the first day was not a smart idea it did set us up for the rest of the weeks perfectly and we were able to be fully stocked the whole game. Sometimes people will mess up but that mess up could be a blessing in disguise. you just have to remember that you will always win some and loose some, the trick is to win more then you loose.
I would agree with Clayton that mistakes can sometimes turn out well for everyone in the end, but I don’t think taking inventory is necessarily “dumb luck”. If it were, I don’t think tactics such as forecasting and EOQ would exist.
I’m glad that you mentioned the question of ordering and holding costs at the end because those were the aspects that I thought were most difficult to balance out, and seeing it applied in a real life situation was interesting.
This made me think about an article I read recently about the negative affect of poor inventory management. It can be difficult to forecast the amount of products in stock, but over time and with much consistency, it will be easier to keep the right number of items in order to meet demands. Not only can managing inventory better help a company run things smoothly, but it can also help build customer loyalty. By having an accurate account of products in stock, products can be delivered faster and as a result, satisfying your customers. This is why many companies and small businesses have resorted to using inventory management software.
It is hard to forecast perfectly with demand being an unknown variable. What I was able to take out of the activity was that it was never good to be out of stock and equally overstocked. While the trends limits were within 15 units demanded and 27, you knew that you needed at least that many at the reordering point.
As mentioned in another article recently posted, miscalculations happen, sometimes for better others for worse. How successfully one can recover from an inventory miscue is equally important. Just as Clayton noted, by ordering a few units that first round the order was not worth the order cost but it helped set them up for the remainder of the game. They were able to adjust their costs accordingly to minimize them better than any other group. Hats off to group 1, while it might be a little more difficult to recover from in real life, this example illustrates how important that recovery can be.
Very interesting facts and I wanted to point out that the holding cost depends on whether the store space is rented or owned. When owning a store space you pay the balance and property taxes and when you rent the space well then you just have to worry about paying the rent usually per square footage. Most big box store usually rent the place from property management companies and the rent price is somewhere included in different items. However some stores pay their rent on the percentage of forecasted sales and not on square footage. The prices at those stores are usually spiked higher than at other places to cover under forecasting.
Every decision you take has its positive and negative effects. That is why you need to weigh the two effects and come out with the best choice. It pays to double check things before you hit the submit bottom. I disagree with you about the bright side, are you guaranteed the price of the overstock inventories is going to be stable, what happens if price falls drastically?
Inventory prices will not always be stable as the economy and people’s taste is always fluctuating, however, the “bright side” was meant as a joke. =)
There was obviously some major mistake made, although this seems to be the cause of a technical error. Anyway, I find it interesting that inventory management can only be as good as its forecast. Maybe they forecasted the demand or price of weed killer was going to sky-rocket in the near future (sarcasm). For the “Gaming Company” activity, the majority of problems were due to inaccurate forecasts. Further more, Group 5 represent!
Our team was “a lot” lost as well when it came to that group activity. Figuering out how much quantity to order without a proper formula can be hit or miss. With what Professor Cook thought us, it will at least give us some sort of outline on how to predict a somewhat close estimate on how much to order. It can become a very difficult and confusing task when ordering that much material. I wonder what happened to the person who ordered all that weed killer. Inaccurate forecasting can definitely cost the company a lot of money.
Wow.. what a nightmare to deal with all that. I wonder how often this happens in the stores we usually shop in. It’s just too bad when holding too much stock occurs. I mean it can be a good thing for customers, because they may get to buy their favorite products on clearance. But if the business continues to lose money by having to sell overstock at reduced prices then the losses have to be made up somewhere else and that’s where consumers lose as well.