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Running Head: MODULE 6: CRITICAL THINKING OPTION 1 1

Module 6: Critical Thinking Option 1

OPS510 Operations Management

Timothy Bernard

CSU-Global

Dr. Powelson, Steven

February 17, 2020

MODULE 6: CRITICAL THINKING OPTION 1 2

Option 1: Operations Inventory Management

Introduction

Inventory management is one of the most expensive assets any company can have, it can

make up of 50% of a company’s capital. The primary objective for any inventory manager is

ensuring inventory investments are well maintained while keeping customer satisfaction at the

fore front (Heizer, et. al. 2017). Through out this paper we will discuss the critical importance of

inventory management and discuss the results of this week’s simulation of assuming the role of

an inventory manager.

Inventory Management

What is inventory management? Well, “Basically, inventory management is the system

used to organize and track all of the company’s goods during the time the company owns them.

Once they’re sold, inventory is converted to revenue.” (Ciemcioch, 2018) Inventory manager’s

main responsibility is to keep track for the demand of a product to determine how many of a

specific product to order. It can be difficult in finding a balance between ordering too many or

not enough. If ordered to many normally means the product will cost a company money to

warehouse a product. On the other hand, if not ordering enough product means the company

runs out of a product and cost the company money for lost revenue. Moreover, it will dissatisfy

customers for not having a specific product, therefore a company will have to have an express

shipment shipped in turn will cost a company even more money (Mora-Ochomogo, Mora-

Vargas, & Serrato, 2016).

There are several ways inventory can serve a company. First, providing goods that are

high in demand from customers and separating the company from fluctuations within that

demand. Second, is separating production processes from their suppliers in case a company’s

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supplies fluctuate. Third, purchasing supplies in bulk since they normally involve some sort of

discount that saves a company money. Lastly, limiting inflation and upward price fluctuations

(Heizer, et. al. 2017).

There are several different types of inventory a company can purchase to help them.

First, raw material inventory, this is material that is purchased but has not been processed. It is

primarily used to separate supplier from a production process. Second, is work-in-progress

(WIP) inventory, this material that went through some change, and is not completely finished

yet. Third, is maintenance/repair/operating (MRO) supplies, which are kept since they are

necessary to maintain and repair equipment. Unfortunately, it’s unknown when a piece of

equipment will break down or need to be maintained, therefore materials must be kept on hands

at all times. Lastly, is finished-goods inventory, this is a complete product a waiting for shipment

or purchase (Heizer, et. al. 2017).

Inventory managers primary responsibility is establishing a system of managing

inventory. One such way of doing this job is called ABC analysis. ABC analysis best described

as when on-hand inventory is classified either as A product, B product, or C product based off

their annual dollar volume (Heizer, et. al. 2017). Class A items will have a higher annual dollar

volume while representing roughly about 15% of the total inventory but makes up of about 70%

– 80% of total dollar volumes. Class B items has a medium annual dollar volume while

representing roughly 30% total inventory but makes up of about 15% – 25% of total dollar

volume. Class C items have a low annual dollar volume while representing just 5% total dollar

volume; however, total inventory makes up of about 55% (Heizer, et. al. 2017).

There are two demand types that a company can utilize for an item. They are either an

independent demand or dependent demand. Independent demand is where the demand for a

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product is separate from a demand of another product. For example, a demand for chairs are

independent from a demand of a dresser. Dependent demand is where demand for a product is

directly influenced by a demand for another product. For example, a demand for Samsung

Galaxy phone components are dependent on the demand for Samsung Galaxy phone (Heizer, et.

al. 2017)

Inventory managers have some very important questions that must be answered to

properly do their job. That is when to order and how many to order. To answer this specific

question, for product that are independent demand, we could use economic order quantity (EOQ)

model. This is probably one of the most commonly used inventory-control techniques. This

method only can be used if certain assumptions are met. First assumption is demand for a

product is known, constant, and separate from decisions of other products. Next assumption, is a

time between placement and receipt of an order is known and constant. Next assumption, is

orders are arriving in one batch at a time. Next assumption, is quantity discounts will not be

possible. The only variable involved are costs of placing an order and costs of holding a product.

Last assumption, is shortages can be avoided by placing orders at the right time (Heizer, et. al.

2017).

Inventory Management Simulation

This week’s inventory management simulation made me assume a role of a store manager

for a large electronics retail store called DigiLife. A newer version Amulet, a very popular

consumer electronics device was released around the same time was hired. As a store manager it

was my responsibility to sell one million dollars’ worth of the Amulet product in one years’ time

of coming on board. While minimizing costs in order to maximize profits. Furthermore, the

work was also rated by my boss’s satisfaction meter, that indicated how well the store manager

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was doing his job. Throughout the simulation the store manager was using the EOQ formula to

determine how much Amulets to order from week to week.

Using the EOQ model as a strategy basis in this simulation, using the formula

Q∗¿√2DS/H Q* = the optimum number of units per order, D= demand in units for the product,

S= ordering cost per unit, and H= holding cost per unit. Given the information during the

simulation, determined the D= fell in between 25 and 50 depending on demand of the day, S=

roughly $6,000, and H= $1.35, obviously had to solve for Q*. Solution for both came out to be

roughly 500 units each week (Appendix A).

Three Inventory Management Operations

First operation experienced within this week’s simulation was working with finished-

goods inventory. As discussed early, this is products that are finished and awaiting shipment or

purchase. Amulets were a completed product by the time the store manager received that and no

iterations were needed to be added for them to be sold.

Second operation experienced is the two-bin system. This system of operation in

inventory management starts with two full bins in inventory and once one bin is empty that is

when to order more inventory. Utilizing this method keeping inventory balanced and didn’t have

too much units in storage costing the company money and space, or did not have too little to

where had to have an express shipment. During the simulation it took six days for a shipment to

arrive at the store. So, once the inventory got to a point where it was low ordered more units the

same day so on the sixth day would receive a new shipment when my last units where on the

shelve.

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Last operation experienced having to deal with holding costs due to units not selling.

During the simulation, supplier we ordered from would give us a discounted deal no mater how

many units we were ordering, a flat rate of $6,000 per order. Holding cost was a flat rate of

$1.35 per unit per day. Store manager had to ensure orders were big enough to reduce amount of

times needed to orders shipped. While keeping inventory levels low enough to keep housing

costs down storing the Amulets.

Simulation Results

After the simulation was completed, was able to reach some of the goals that were set

before the simulation started. Store manager brought in a total revenue of $3,142,515 and a total

cost of $2,018,620 that brough a total profit of $1,123,895 that exceeded the original $1,000,000

profit goal objective (Appendix C). The EOQ order accuracy for the entire simulation is rated at

41.38, which according to the simulation majority of orders were placed below EOQ and did a

decent job at minimizing costs (Appendix A). The store managers boss satisfaction rating was

satisfactory since meeting the majority of the simulation objectives.

Three Lessons

First lesson learned during the simulation was how to use EOQ method properly. IT was

interesting to experience first hand to use the calculations to forecast how much Amulets to order

too minimize holding costs while maximizing profits. Second lesson learned is the critical

importance of record keeping and accuracy. This is important to keep inventory levels up-to-date

as possible and make it easier decision for an inventory manager how much and when to order

more units. Last lesson learned is how much market upturns or down turns influence a demand

for a product. At first sales took a huge hit when the Amulet was first introduced and demand

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was moving at a snail’s pace. Once demand took off just about overnight, sale skyrocketed,

which made reaching the profit goal milestone much easier achieve.

Conclusion

Each and every company has an operation to keep track of their inventory and the

company’s inventory manager is primarily responsible to maintain current inventory level.

While additionally forecasting when new inventory has to be ordered. Throughout this

simulation, the store manager was responsible for achieving the net profit of one million dollars

selling the Amulet product and managing inventory levels in minimizing holding costs and

maximizing profits. The store manager achieved two out of the three objectives, utilizing the

EOQ method determining how much Amulets to order at a time, while ensuring customers were

satisfied by continuously having the item in stock.

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References:

Heizer, J., Render, B., & Munson, C. (2017). Operations management: Sustainability and supply chain management, (12th ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Ciemcioch, Steve, September 21, 2018, Everything you Need to Know About Inventory Management, retrieved February 18, 2020, from https://www.warehouseanywhere.com/resources/inventory-management/

Mora-Ochomogo, E. I., Mora-Vargas, J., & Serrato, M. (2016). A qualitative analysis of inventory management strategies in humanitarian logistics operations. International Journal of Combinatorial Optimization Problems & Informatics, 7(1), 40-53. Retrieved from http://www.redalyc.org/pdf/2652/265245553006.pdf

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Appendix:

A:

B:

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C:

D: