Consequences Of Holding Low Inventory, EOQ And Inventory Challenges

Consequences of holding low inventory

The focus of the current assignment is the supply chain and logistics management which is considered the most important business functions of an entity (Henderson, Stephens and Montgomery,  inventorytech Ltd, 2018). The subtopic of this assignment is related with the forecasting methods and the inventory management which includes the economic order quantity method used to determine the overall performance of an entity (Ouyang, Tang and Ting,institute for information industry, 2018). The motive of an entity is to determine the monetary and non-monetary performance of the business by using various methods and policies. The current report will help in identifying the potential of an entity by using various methods of managing all the inventories due to the competitions arises in the external market (Dimas, Murata, Neiro, Relvas and Barbosa-Póvoa, 2018). The consequences of holding very low inventories are discussed under this assignment to know the actual position of an entity whether to continue or withdraw its business interest from the external market as the motive of an entity is earn higher amount of profit which is the ultimate aim of the company that is to earn a profit (Drewniak and et.al., 2018). A firm is operated in the external market to meet all its aim and the objectives by satisfying all the internal as well as the external users as their ultimate is to sustain all of them with its business concern for a longer span of time.

Keeping inventory is essential to meet the demands and higher expectations of all the customers which are uncertain in nature which requires an entity to pile up inventories after analyzing the demands of all its users to avoid the shortage inventory problem. Management of the inventory is considered as an integral business process which will get automated nowadays by using several electronic devices based on the latest technology aims to safeguard the position of the business (Dev, Shankar and Choudhary, 2017). Holding an inventory requires the incurrence of costs such as managing costs to keep all the inventories in a warehouse to safeguard them from the weather conditions and from thieves.

The advantages of keeping low inventory levels in an entity are discussed below to show the positive consequences of holding a low level of inventory in an entity:

Less holding costs- An entity owner is required to incur costs of holding an entity which consists of several costs such as carriage costs, warehouse space, labour charges, cold storage for perishable products, utility charges. All these charges are required by an entity for holding all the inventories in an entity (De Ridder and Lensvelt-Mulders, 2018). The holding costs will fluctuate with the total levels of inventories held by an individual in its business. The holding costs will get reduces when an entity’s inventory level is very low. But from the perspective of meeting the needs of its customers, the very low inventory level is not favourable for the business as in that case an entity will not be able to meet its customer’s demands which will lead to the shifting of the interest of its users from one player to another.

EOQ method for inventory management

Proper management- The management process for an entity will get easier when the level of the inventory will get reduces as this also all the logistics manager to easily manage the available inventories by categorizing them into various categories by allotting different batch numbers to track the movement of all the inventories (Cachon, Gallino and Olivares, 2018). It is essential to keep a track of all the inventories to know the amount of issue and the purchase of inventory to determine the profits generated by the business in a particular month. The efficiency and the effectiveness of all the inventories can be checked easily when the volume of inventory is very low (Consequences of keeping low inventory level, 2018). When the inventory is low, then the costs will also get reduces in managing all the inventories which, in turn, induces the overall inventory turnover in a given span of time.

Available cash- cash is a liquid component which helps in meeting short-term liabilities incurred by an entity to avoid the situation o the liquidity trap as cash is essential to purchase the inventory but when the costs of purchasing gets reduces due to the low levels of inventory in an entity the available cash is utilized in paying off various expenses and also acquire certain products to get the higher market as compared to all its competitors

Economic order quantity is a method used in managing an inventory as it is a production approach used to determine the goods required in an entity to fulfil its requirement (Wild, 2017). This will also consist of purchasing of inventories by ascertaining the carrying costs and ordering costs while ordering any order from its suppliers.

An entity’s aim is to minimize the total costs incurred in the business for ordering goods and services from the suppliers in the form of raw inputs which will further converted into the finished output to induce the efficiency of the total production (Bouchery,  Ghaffari, Jemai and Tan, 2017). With the help of this approach, the entire inventory costs will get reduces which will allow an entity to invest the saved amount to get invested on important sources to generate the desired return in a given span of time (Economic order quantity, 2018). The actual meaning of this approach is that this helps in increasing the economic performance of an entity by decreasing all the costs and inducing the calibre of the business to target more investment sources to get the desired return (Yang, Chung, Chao and Chien, 2018). It is regarded as an effective tool that helps all the supervisors and purchasing managers to know the total amount of inventory available in an entity and what more is required to fulfil its requirements.

Inventory challenges in the supply chain diagram

Calculate EOQ for drums of grease

Sale quantity= 4000 drums per year

Inventory holding cost= R 8

Cost of placing order= R250

EOQ= √2CU/H

C= cost of placing order

U= annual usage

H= Inventory holding

= √2*250*4000/8

= √2000000/8

= 500 drums of grease

Calculate number of orders to placed in a year

= Annual usage/EOQ

= 4000/500

= 8 orders

Calculate EOQ for raw material Z54 for 20.7 financial year

Materials consumes in one working day = 2400 units

Total working days in the 20.7 financial year= 250

 Annual usage= 2400*250

= 600000

Cost of Placing order = R120

Cost of holding inventory= R3390+1% of invoice price

Invoice price = R10

= R3390+ (10*11%)

= R3390+ 1.1

= R3391.1

EOQ= √2CU/H

C= cost of placing order

U= annual usage

H= Inventory holding

= √2*120*600000/3391.1

= √144000000/3391.1

= √42464.09

= 206.06 or 207 units

Calcualte number order should be placed during 20.7

= Annual demand/EOQ

= 600000/207

= 2898.55 or 2899 orders

FIFO method- First in first out method is an inventory management method which refers to a method used in valuing the goods in the form of inventories available in an entity. Under this method, oldest goods are sold as compare to the good purchased currently (Widjaja, Zeno Semiconductor Inc, 2017). The assumption used behind his method is that all the good purchased first in an entity are sold first before the goods get outdated as the goods cannot be stored in a business for a longer time period as the tastes and the preferences of the customers are fluctuating in nature which changes as per the time (Inventory valuation methods, 2018).

Weighted average method- In this process, the goods sold in an entity by taking the average of the costs to determine the weighted average cost on which rate the goods is sold to the external party without taking opening or closing rate. This system of inventory valuation is used in the manufacturing industry such as chemical and oil industry in which the prices of goods fluctuates from one period to another under which only weighted average of cost estimated is consider as the best suitable method (Marsh, H. W. and Scalas, 2018). Using this method, the cost calculated for the inventory valuation should be determined as an average cost per unit to help an entity to know the number of units to be sold by an entity.

FIFO METHOD
	Purchases	Issues and returns	Balance
Date	Quantity	Cost	Amount	Quantity	Cost	Amount	Quantity	Cost	Amount
01							2000	30	R60000
08				1600	30	48000	400	30	12000
11	1800	31	55800				400 1800	30 31	1200 55800
18				400 1500	30 31	12000 46500	300	31	9300
21	2000	32	64000				300 2000	31 32	9300 64000
25				300 1100	31 32	9300 35200	900	32	28800
				100	32	3200	800	32	25600

WEIGHTED AVERAGE COST METHOD
	Purchases	Issues and returns	Balance
Date	Quantity	Cost	Amount	Quantity	Cost	Amount	Quantity	Cost	Amount
01							2000	30	R60000
08				1600	30	48000	400	30	12000
11	1800	31	55800				2200	30.81	67782
18				1900	30.81	58539	300	30.81	9243
21	2000	32	64000				2300	31.8	73140
25				1400	31.8	1368.2	900	31.8	28620
30				100	32	3200	800	31.775	25420

Weighted average cost for 11th

(12000+55800)/ (400+1800)

= 67800/2200

= R30.81

Weighted average cost for 21st

(9243+64000)/ (300+2000)

= 73243/2300

= R31.8

Weighted average cost per unit for 30^th

(28620-3200)/(900-100)

= 25420/800

= R31.775

Poor communication- It is clearly visible from the above supply chain diagram that there is poor communication from all the departments which further leads to the dissatisfaction among its customers as a user will not get what they want. The regional and field warehouses of an entity are not connected with an entity’s business as these department members are not aware of the announcements made by an entity which will decrease their interest.

Poor management- The supply chain diagram shows the cross connection as it shows the chaos among all the department as all the department orders at the same time which in turn creates problems for all the staff members to fulfil the wish all the customers to improve the overall performance of an entity but due to this clashes the productivity of an entity will get hamper.

Lack of forecasting- Forecasting is essential to determine all the costs to be incurred in the future as with the help of this the future trends and patterns about the tastes and the preferences of the customer will get identified. The clashes ad chaos occurs in an entity due to improper and invalid forecasting about the market.

Conclusion

It is summarized from the assignment that EOQ and inventory valuation methods are essential to determine the total performance of an entity to know the actual worth of the business to guide them whether to continue or divest its business units to safeguard its business from all the rivals operated in the external market who are trying to steal the attention of an entity.

References

Books and journals

Bouchery, Y., Ghaffari, A., Jemai, Z. and Tan, T., 2017. Impact of coordination on costs and carbon emissions for a two-echelon serial economic order quantity problem. European Journal of Operational Research. 260(2). pp.520-533.

Cachon, G. P., Gallino, S. and Olivares, M., 2018. Does adding inventory increase sales? evidence of a scarcity effect in us automobile dealerships. Management Science.

De Ridder, D. T. and Lensvelt-Mulders, G., 2018. Taking stock of self-control: A meta-analysis of how trait self-control relates to a wide range of behaviors. In Self-Regulation and Self-Control (pp. 221-274). Routledge.

Dev, N. K., Shankar, R. and Choudhary, A., 2017. Strategic design for inventory and production planning in closed-loop hybrid systems. International Journal of Production Economics. 183. pp.345-353.

Dimas, D., Murata, V. V., Neiro, S. M., Relvas, S. and Barbosa-Póvoa, A. P., 2018. Multiproduct pipeline scheduling integrating for inbound and outbound inventory management. Computers & Chemical Engineering. 115. pp.377-396.

Drewniak, M., and et.al.,  2018. System and Method for Automated Control, Feed, Delivery Verification, and Inventory Management of Corrosion and Scale Treatment Products for Water Systems. U.S. Patent Application 15/908,163.

Henderson, L. H., Stephens, L. A. and Montgomery, P. J., INVENTORYTECH Ltd, 2018. Event detection system and method for real-time inventory management system. U.S. Patent Application 15/573,744.

Marsh, H. W. and Scalas, L. F., 2018. Individually Weighted-Average Models: Testing a Taxonomic SEM Approach Across Different Multidimensional/Global Constructs Because the Weights “Don’t Make No Nevermind”. Structural Equation Modeling: A Multidisciplinary Journal. 25(1). pp.137-159.
Online

Ouyang, Y. I., Tang, C. J. and Ting, Y. J., INSTITUTE FOR INFORMATION INDUSTRY, 2018. INVENTORY MANAGEMENT SYSTEM AND INVENTORY MANAGEMENT METHOD. U.S. Patent Application 15/369,767.

Widjaja, Y., Zeno Semiconductor Inc, 2017. Dual-port semiconductor memory and first in first out (FIFO) memory having electrically floating body transistor. U.S. Patent 9,589,963.

Wild, T., 2017. Best practice in inventory management. Routledge.

Yang, M. F., Chung, W. H., Chao, Y. T. and Chien, H. T., 2018. Economic Ordering Quantity Model for Optimal Buyer‘s Replenishment Policy Considering Expiring Goods. In Proceedings of the International MultiConference of Engineers and Computer Scientists (Vol. 2).

Consequences of keeping low inventory level, 2018. Available through: < https://smallbusiness.chron.com/advantages-low-inventory-levels-15997.html > [Accessed on 19^th August 2018].

Economic order quantity, 2018. Available through: < https://www.myaccountingcourse.com/accounting-dictionary/economic-order-quantity> [Accessed on 19^th August 2018].

Inventory valuation methods, 2018. Available through: < https://www.accounting-basics-for-students.com/fifo-method.html> [Accessed on 19^th August 2018].