Week 14

This week we studied Inventory Management.  Our textbook describes it as, "the planning and controlling of inventories in order to meet the competitive priorities of the organization."  "Effective inventory management is essential for realizing the full potential of any value chain."  

Whenever an organization has more receipts of materials, parts, or finished goods than what is disbursed, inventory is created.  Inventory is depleted when disbursements exceed receipts.  There are advantages and disadvantages to maintaining low and high inventories.

The pressures for low inventories include elements that comprise what is termed Inventory Holding Cost:

• Cost of Capital
• Storage and Handling Costs
• Taxes
• Insurance
• Shrinkage

The pressures for high inventories include:

• Customer Service
• Ordering Costs
• Setup Costs
• Labor and Equipment Utilization
• Transportation Costs
• Quantity Discounts

One of the inventory management tools that made an impression on my mind is the mathematical formula called Economic Order Quantity (EOQ).  The EOQ helps identify the lot size that minimizes total annual cycle-inventory holding and ordering costs.  The EOQ is based on the following assumptions:

• The demand rate for the item is constant and known with certainty.
• No constraints are placed on the size of each lot.
• The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup.
• Decisions for one item can be made independently of decisions for other items.
• The lead time is constant and known with certainty.

In reality such simple situations are rare, but the EOQ is often a reasonable approximation of the reasonable lot size, even when several of the assumptions do not quite apply.  The formula for EOQ is derived using calculus.  It is the square root of the quotient 2DS/H; where D=annual demand, in units per year, and S=cost of ordering or setting up one lot, in dollars per lot, and H=cost of holding one unit in inventory for a year, often expressed as a percentage of the item's value.

My reason for such interest in the EOQ is due to a casual conversation I had with a former bishop of mine the other day.  We were both doing some service at a Bishop's Store House in Magna, a few days after I learned about EOQ in class, when my former bishop asked me what I was studying in school.  I told him about my classes.  His response regarding this operations management class surprised me.  He knew what I was talking about.  He was very interested in the subject.  I found out that he's been using the principles and techniques I've learned in class in his own career.  EOQ was the most recent thing in my mind so I mentioned it to him.  He knew all about it.  The experience impressed EOQ into my mind even more.  If I'm ever responsible for inventory, I will refer back to EOQ and other tools that I've learned in class.