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?