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?

Lack of Forecasting

Last week, we had an in class activity about a Chicago Manufacturing company that was supplying printers, copiers, and replacement parts. The manager of this company was reluctant about forecasting on it supplies. As we all know, forecasting is very vital for every company if it wants to succeed.  When a company fails to forecast, it either end up with a shortage of inventory or overstock of inventory. Any of these can have an adverse effect on the company. Shortage could lead to loss of customer, which will lower revenue and eventually lead to smaller profit margin.  Likewise, overstock would lead to tying up of working capital, and cost of storage which will lead to higher cost, and smaller profit margin.  This manager’s attitude towards forecasting reminded me of my own passed experience.

Once I owned a retail shop selling only soft drinks. I registered with four different beverage manufacturing company. The following are the companies I was doing business with, Coca Cola Company, Pepsi Cola Company, Club Cola Company, and Malta Guinness Company. All these companies are solely on cash bases, they do not accept credit sales.  Also, they supplied me on weekly bases, and on different days. Whatever sales I made, when a particular supplier came I used that money to buy that company’s products. What I was forgetting was that, all the sale does not belong to only that one company, but to all the four companies. At the end of the week I end up having either shortage of overstock inventories. My case was not reluctant towards forecasting, I was actually not thinking, and did not have any idea about operation management. I realized it only when it was too late, by then I had lost most of my valuable customers.  

Although there are different types of forecasting, I could have simple used the demand forecast to forecast for my business supply since it was on weekly bases. Demand forecast would have helped me in predicted which of the four products were selling fast and which ones were selling slowly. Then I would have adjusted my style of inventory taken. Hence, it would have safe the business because it was really in a very good business location, and also, my initial sales were fabulous.

Forecast is not only an important part of every business, but also to our everyday life activities. It is one of the reasons why we always listen to the weather. In that case we can prepare adequately to what the future holds for us. Does anybody agree with me about forecasting being an important part of our daily life? Also, do all companies/businesses that lack forecasting fail?