The concept of operation management is associated with the management of the core purposes in the business organization who has related products and services. It is also related with designing and control of the production processes and this will also help in redesigning the business. The operations also produce those products which manage the quality and create different services. Moreover, operation management also covers the banking system, customers, suppliers and using the different technologies. Operation is one of the major functions of the organization which is associated with supply chain, human resources, marketing and finance (Fernie & Sparks, 2014). It is necessary to manage the operations to balance the different inventories so as to satisfy the customer demands. It is also necessary to manage the actual demand in the market for the products and services without involving the company in unnecessary risk and cost. It is also necessary to meet the customer demands and maintaining the finished goods inventory will also help the company in fulfilling the demands of the customers. It is also necessary to maintain an adequate supply and thus this will also lead to the satisfaction of the disappointed customers. The inventory control helps in protecting the company from fluctuations in the demand of its products (Smith, Maull & CL, 2014).
The inventory management of any organization is regarded as the backbone e of the organization. The product performance, cost efficiency, dependability and flexibility are the various concepts which are associated with operation management. The organizations are trying their best o the different dimensions and when there are certain competencies in different areas it will also help in the effectiveness of the organization. Although time is considered as a critical dimension of various competition from the service and the manufacturing industries. The strategic planning also helps the organization in the current mission and the various environmental conditions in setting certain decisions. It is also necessary for competitiveness in the market based view of strategic planning. The strategic business unit of any organization also helps in corporate resources, general competitive industry and other technical capabilities. Quality is such a degree which helps the products and the services to meet the organizational and the customer expectations (Heizer, 2016).
An example can be cited of the fast food industry such as Mac Donald’s. It has started in 1940 with a very small restaurant but gradually with the passage of time, the company has changed its fate completely. Its main objective was to cater good quality food to the customers and to serve them at a faster pace. The company also aimed to perform corporate social responsibility effectively. It has performed all its duties in an effective way. A proper analysis of the strategic objective of Mac Donald’s depicts that it has set up its strategy in a proper way. The company mainly focused on speed, quality and customer satisfaction. It has also given training to its staff members for delivering proper service. The main operation of Mac Donald’s was the production quality and the purchase of raw materials, procurement of raw materials and various kinds of machinery, customer service, advertising, production and quality maintenance, pricing and corporate social responsibility. It was necessary for Mac Donald’s to maintain the inventory timely. The company has always provided fresh food to the customers and it has also managed its daily stock and kept a track of all the available materials that are to be ordered or needs to be ordered. The entire stock management process is designed in a very proper way (Macdonald, Kleinaltenkamp & Wilson, 2016).
The most important task was the procurement of raw materials and to keep a track of the inventories. It is important for the company to sell the products that have arrived earlier. The restaurant has used the First In First Out method to keep a check of the raw materials that have arrived earlier. This also helps to double check the stock of raw materials. The entire method of stock management is defined in such a way that the principle of “first in and first out” is strictly followed. The products of Mac Donald’s must also follow a certain protocol so that the quality and standard of the product do not deteriorate. Thus, it can be said that much effort is done by the company to maintain the quality of food (Mena, Humphries & Choi, 2013).
Economic order quantity helps in calculating the amount of goods and products the company should purchase toin order to reduce the total cost involved in inventory including other costs such as ordering and holding cost. However, it is seen that holding cost and ordering cost moves in opposite direction because an increase in the ordering cost will cause a decrease in holding cost of the company (Chen, Cárdenas-Barrón & Teng, 2014). Economic Order Quantity has number of assumptions such as
These are some of the assumptions offered by the theory on the inventory control. However, the usage of the model and its assumptions in real world is yet to be tested. Someof the assumptions of the model do have their application in real world. For instance, the can know the amount of cost that will increase if they increase the ordering quantity. This is the number of order because the quantity that the company is ordering has a cost and it increases with number (Cobb& Johnson, 2014). On the other hand, one more assumption such as the carrying cost increases with an increase in the number of ordering quantity. It is realistic because the quantity of order needs to be carried from one place to the other and this requires a cost. Thus, number of order and cost are directly proportionate and is realistic. However, other assumptions such as demand are known and the lead-time for the inventory is not real in nature. This is because the demand is something that comes from the customers and it cannot be estimated by the company accurately from before by the manufacturer. Thus some of the assumption of the model is unrealistic in nature. Thus, the Economic Order Quantity tool is not advisable for the goods that has low shelf life (Elking et al., 2017).
Safety stock is yet another important variable to be considered in the inventory model. It is the amount of goods or order the company maintains with itself in order to be safe from being run out of stock due to uncertainties related to demand and supply. Economic Order Quantity reflects the quantity that the company should order keeping in mind the assumption of this model. However, safety stock shows the inventory that helps in triggering the order with some additional units. However, on the other hand, safety stock and re-order point are both inter-related as they both reflect the same meaning of reordering the extra stock that the company require as inventory. The assumption of lead time also holds for safety stock and reorder point as it was in Economic Order Quantity (Feng, et al., 2014). Lead time in case of safety stock is the time gap between the placement of the order and the time at which goods arrives. Yeas, Economic Order Quantity model is still used as one of the widely applicable model of inventory ordering in the business. It is the most commonly used model for inventory and stock control. This is because it helps in calculating every type of costs such as stock holding cost, order placing cost, storage cost and others. The economic order quantity also plays an important role in determining other costs such as reorder points, safety stock, quantity discount model and others. Thus the EOQ model is important for every aspect of inventory control a company can use. Even though type has been criticism related to the Economic Order Quantity model for inventory cost calculations yet the advantages of this model is way higher and it is still used as the most useful model. Although some of its assumptions are not realistic such as the fixed demand, lead time known and others, the model is used mostly for inventory measure except in some cases when the demand fluctuates (Gupta& Iyengar, 2014). Thus EOQ is the ideal model for controlling and reducing the cost of inventory at every level of the business.
Cost of inventory= $17,000 per day
Annual interest rate= 9 percent
Loan fees= $1,200 and 2.25 percent
The amount of loan Christie should borrow from the bank is $17,000 * 305 days
This stands to $51,85,000, which is the total amount of loan Christie will require for the annual year
The bank currently charges 9 percent for the loan. Thus the total cost the company will bear for the loan that it requires for an year is:
Annual ordering cost: 9% of $51,85,000
Annual ordering cost: 9/100* $51,85,000
This come to $4,66,650 is the amount or total cost the company will pay to the bank as a cost of offering them the loan.
This is because the total cost of the company for the inventory is calculated by summing up the annual ordering cost and annual carrying cost. However, in this case the carrying cost is zero as the money is directly transferred by the bank as loan amount. Thus the total cost is equal to the annual ordering cost (Hoberg et al., 2017).
Total Cost= Annual ordering cost + Annual carrying cost
= $4,66,650 + $ 0
= $4,66,650
The loans should be borrowed by the company in four quarters to meet the inventory of the whole year. This will help the company to keep an estimation of their cost over a financial year and give them the chance to bear the cost of the next quarter from the revenue of the first quarter.
The amount of cash that the company should keep in hand before applying for the loan at the beginning of the year is the fifteen days cash demand it needs for the inventories. This is because the bank takes fifteen days to process the loans in the account of the company.
Thus the level of cash on hand should be $17,000*15 days.
This is because the company needs $17,000 cash for purchasing the inventory.
Thus the cash requirement for the first fifteen days are= $2,55,000
Figure 1: Relationship between ordering cost, holding cost and total cost
Source: (Sarkar, Chaudhuri & Moon, 2015)
Q*= √2DS/H
In the following formula:
Q= optimal order quantity
D= units of annual demand
S= cost incurred to place a single order
H= carrying cost per order
This makes the total cost function as:
Total Cost= purchasing cost+ ordering cost + holding cost
In the economic order quantity the size of holding cost and ordering cost is minimized. Both holding cost and ordering cost are inversely proportionate to each other as shown in the diagram. An increase in one cost will cause a decrease in other as shown in the diagram above. It is seen that as cost of holding is increasing continuously, the cost of ordering is decreasing. This is because as the size of the order increases then the company is required to buy dew orders. This causes a reduction in the number of order. This reduces the cost of order. On the other hand, the holding space for bigger size of the order leads to an increase in cost. This increases the cost of holding. Thus, this shows that holding cost and order8ng cost moves in a opposite direction. The total of annual ordering cost and annual holding cost makes total cost of purchasing and holding inventory (Sarkar, Chaudhuri & Moon, 2015).
Annual total cost= annual ordering cost+ annual holding cost
= C0D/2 + CcQ/2
This shows that total cost is directly related to holding cost and ordering cost. The summation effect of both the cost effects the total cost and its curve. This is the relationship between these three costs. It is seen that at first the total cost is decreasing because the fall in holding cost is more than the increase in ordering cost. However, a point is reached at which total cost reaches zero and then start increasing. This is because after the point zero, the fall in holding cost is less than the increase in ordering cost.
The optimal amount borrowed will now increase as the cost of borrowing has been decreased by the bank. The interest on the loan amount has now been reduced by a greater percentage.
Optiomal quantity= √2*0.9*17000/0.2
= $1,53,000
References
Chen, S. C., Cárdenas-Barrón, L. E., & Teng, J. T. (2014). Retailer’s economic order quantity when the supplier offers conditionally permissible delay in payments link to order quantity. International Journal of Production Economics, 155, 284-291.
Cobb, B. R., & Johnson, A. W. (2014). A note on supply chain coordination for joint determination of order quantity and reorder point using a credit option. European Journal of Operational Research, 233(3), 790-794.
Elking, I., Paraskevas, J. P., Grimm, C., Corsi, T., & Steven, A. (2017). Financial dependence, lean inventory strategy, and firm performance. Journal of Supply Chain Management, 53(2), 22-38.
Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review, 90(2), 529-557.
Fernie, J., & Sparks, L. (2014). Logistics and retail management: emerging issues and new challenges in the retail supply chain. Kogan page publishers.
Gupta, S., & Iyengar, C. (2014). The tip of the (inventory) iceberg: while most retailers focus on the inventory that is visible in their stores and distribution centers, too few pay attention to the hidden costs of high inventory. Supply Chain Management Review, 18(6).
Heizer, J. (2016). Operations Management, 11/e. Pearson Education India.
Hoberg, K., Hoberg, K., Protopappa-Sieke, M., Protopappa-Sieke, M., Steinker, S., & Steinker, S. (2017). How do financial constraints and financing costs affect inventories? An empirical supply chain perspective. International Journal of Physical Distribution & Logistics Management, 47(6), 516-535.
Macdonald, E. K., Kleinaltenkamp, M., & Wilson, H. N. (2016, May). How business customers judge solutions: Solution quality and value in use. American Marketing Association.
Mena, C., Humphries, A., & Choi, T. Y. (2013). Toward a theory of multi?tier supply chain management. Journal of Supply Chain Management, 49(2), 58-77.
Sarkar, B., Chaudhuri, K., & Moon, I. (2015). Manufacturing setup cost reduction and quality improvement for the distribution free continuous-review inventory model with a service level constraint. Journal of Manufacturing Systems, 34, 74-82.
Smith, L., Maull, R., & CL Ng, I. (2014). Servitization and operations management: a service dominant-logic approach. International Journal of Operations & Production Management, 34(2), 242-269.
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