Submitted by: Submitted by boskovel84
Views: 1137
Words: 1302
Pages: 6
Category: Business and Industry
Date Submitted: 03/02/2013 04:38 PM
Effective inventory management is essential for meeting the competitive priorities of the organization and an important concern for managers in all types of businesses. Decisions-making aspects of inventory management involve trade-offs: holding too much inventory on hand reduces profitability as funds invested in inventory are not available for investment in other things; and having too little inventory creates supply shortages and leads to loss of sales, market share and ultimately damages customer confidence and loyalty.
The Problem
Parts Emporium Inc. is the largest independent wholesale distributor of automobile parts in the north central region. The trend toward longer car ownership, backed up by the increased selection due to expanded product offering led to an explosive growth of the business.
To address the needs of the growing business, the company reallocated its operations to a new complex, involving a 100,000 square feet warehouse. Despite the increased utilization of the warehouse capacity, the company experienced stagnation in the sales growth. The newly appointed materials manager, Sue McCaskey, found out that although an average of approximately 60 days of inventory is on hand, the firm’s customer service is inadequate with nearly 10% of the demand being lost to competing distributorships. To her, the need to change the total inventory management system is more than apparent. She needs to gain the support and commitment of the company’s top management by demonstrating the benefits deriving from proper inventory management.
Equations
The following calculations will be used to demonstrate the benefits that Parts Emporium will yield from the introduction of a proper inventory management system:
Total annual cycle-inventory costs = annual holding costs + annual ordering costs
Economic Order Quantity (EOQ) – the lot size that minimizes total annual inventory holding and ordering costs (Krajewski, Ritzman,...