Impact of Inventory on Businesses

The fourth week of class we had an in class activity, where each group was given a task of ordering inventories. We were provided with the last 2 years weekly demand of The Gaming Company, the first week beginning inventory of twenty weeks, the setup costs, inventory costs, shortage costs, and finally, each week’s demand. With our knowledge of the last 2 year demand, our group kind of predicted what the next twenty weeks demand would be. We know the ordering cost was fixed. We thought we could use that advantage to order for every four or five week’s inventories, so we can save on ordering costs. The less frequent we order the lesser the setup cost would be.  We also looked at the difference between the storage and shortage costs, and decided we rather prefer to hold the inventory because it is ten times cheaper than the shortage costs. We were doing well with this method until we messed up on our last order. We didn’t want to order again after this last ordering. Also, we did not want to take any chances of shortage so we ordered beyond the normal. This caused us dearly.

I am saying this to emphasis on how important every aspect of operation management is to businesses. Inventory management is a special aspect of every business, and proper attention should be assigned to it. This can make or destroy businesses. Inventory management look so simple to handle, but it can easily be messed up.  I know this because it happened to me when I was once in business. I was just ordering without any formula, and this led to the collapsed of my business. Over and under inventory have their own advantages and disadvantages, but I think the disadvantages outweigh the advantages. Inventory appears on the assets side of the balance sheet. This is used to calculate the current and quick ratios. These ratios are some of the things that help creditors, investors, and others to form their own opinion about a business. Businesses will like to have cash and receivables on their balance sheets than inventories because it speaks well of them. Inventory management deals with only two questions which are, “how much to order” and “when to order”.

Knowing the above will enable you calculate for your Economic Order Quantity (EOQ). You can also calculate your ordering costs, holding costs, unit cost, re-order level and lag time. Having all these information at hand will help you solve the problem of under and over inventories which is crucial to most business survival. Everyday hundreds of businesses are opened and closed. Do you think their closure is due to improper inventory management? After learning operations management this quarter, what advice will you give to business suffering from inventory management?

6 thoughts on “Impact of Inventory on Businesses

  1. Inventory management is indeed a critical aspect of a business’s success. Not having enough finished goods inventory on hand can cause a company to lose its customers to competition, and having too much might result in unexpected costs as products expire lying in the warehouses.

    Your post reminded me of an incident I once faced at work. We had started handling the distribution and sales of food products and the operations team mistakenly ordered too much inventory. Food products have a much shorter expiration duration and as our inventory lay in storage, no customer was willing to buy the near-expiry products. Consequently, we lost huge sums of money in unused inventory. Lesson learnt: it is crucial to predict accurately when and how much inventory an organization should order.

  2. Inventory management certainly is a very important aspect of any business. An example I can share is that my parents have their own beauty supplies company which they started about a year ago. As most of us know, the beginning of a company is always a learning process. My parents do not have a set location for housing their stock products; some items are stored at our house, others in another storage facility. One problem is when trying to retrieve an item it takes a lot of time since they cannot locate it immediately, another problem is they lose track of available quantities of products since the inventory system is not managed by one sole person. Therefore, they are now working on assigning the inventory management task to one person and having all the products stored in one location. Inventory management can definitely keep a company going strong or can tear it down.

  3. I believe that inventory management is a vital concept in any business, inventory management is all about ensuring that everything about your stock is well planned and organized such that there is easy flow of stock within and outside the firm. Form my experience working in hospital. the pharmacy of the hospital have to make inventory regularly every six month to make sure about the stocks to satisfy all orders coming from the Doctors to make sure the medicine is available in the stock at all time , it is a complex thing and quite challenging . However, daily check is needed to ensure efficacy. Computers these days have helped to save such time because alert props up when stock nee to ne reorder.

  4. Without a doubt, proper inventory management is the key to ensure smooth operations of any business. In the aviation industry, airlines ensure that they have as much as necessary spare parts, tools and equipments required for daily operation, but some companies are decidedly conservative on buying enough supply of some spare parts due to the high cost of a single item and limited shelf life. Consequently, airlines sometimes losses hundreds of thousands because of technical delays of flights that occurs due to unavailability of a certain item. Flights delay causes adverse impacts on both the company itself and the passengers. Passengers will be disturbed as they have to reschedule their trip or might miss a business meeting or momentous events at destinations they intended to go. Besides, airline companies will undergo difficulties in handling delays by disbursing direct and indirect costs. Direct costs like compensation allowances for passengers, hotel and food arrangements, airport ground time fees and repair costs. Indirect costs such as rescheduling of flights and networks, awful publicity as well as losing customer loyalty. Thus, improper control of inventory would instigate unnecessary extra costs to the company.

  5. Modern inventory management processes utilize new and more refined techniques that provide for dynamic optimization of inventories to maximize customer service with decreased inventory and lower costs. These improved approaches to inventory management are of major consequence to overall competitiveness where the highest level of customer service and delivered value can favorably impact market share and profits. For many small retailers, the largest asset on the balance sheet is inventory. But without careful planning, inventory can easily get out of whack, resulting in heavy markdowns due to overstocks and ultimately, serious cash flow problems. The solution to any company is careful planning and be just in time inventory management might also prove useful for the large manufacturing environments.

  6. The concept of inventory management is a novel idea, especially in this ever changing business environment focusing on customization. I worked for a well-known company and its unbelievable how at times there is no set system to take accountability on inventory. Each time I see inefficiency at work I can’t help but analyze and the adverse costs associated with it. I am currently studying accounting and I have taken several classes that dissect problems and provide solutions for our current situation at work. One notable class is managerial, or cost, accounting. I highly recommend this course of study. Through cost accounting, you can thoroughly learn different ways to account for inventory and utilize capacity.

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