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Evaluating managerial insights of 2 different models of inventory management.

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Introduction

Executive Summary This paper aims at evaluating managerial insights of 2 different models of inventory management. With the purpose of developing inventory policy this paper examines two different models; Economic Order Quantity model and Simulation with an identical hypothetical problem situation. Comparing the Results obtained from the two models illustrated EOQ model to be very simple and easy to use, but in complex and real world situation with an uncertain demand Simulation is the preferred model. Introduction The optimal inventory level is delicate balancing act. Inventory decision is complicated because of conflicting goals within departments of a single company. Inventory includes not only on investment in material but also in investment in labor. However, as long as inventory remains with a company it represents a certain cost. The main reasons holding inventory are * Cycle - the minimum order amount required to cover the demand * Safety - stocks need to be held to avoids stoppage in production due to shortages * Stock outs represents a cost to company when production is halted Inventory is also held in the case of an anticipation of demand trends. Undoubtedly there are costs associated of holding inventory. ...read more.

Middle

The present inventory policy as developed for One Touch Solutions Ltd shows the following results: According to the EOQ (refer Appendix -I) the optimal quantity to be ordered is 430 units every month. The relevant cost associated with this order quantity is $ 13,470.28 * The optimal order quantity (Q*) is 430 units. * The total relevant cost scaled to one year - TC (Q*) is $13,470.28 * The cycle time / time between orders (T) is 50 days. With the above example, the following advantages make the scorecard for the EOQ model: 1. The most important advantage is that it provides the optimal order quantity at the minimum possible cost. 2. It provides an approximation of cycle time. A reorder point is arrived at with this model. 3. It is easy and simple to implement in almost any kind of organization. However, these advantages are counterbalanced by the disadvantages of the Economic Order Quantity model that arise because of its simplicity: 1. The EOQ model is so simple that it cannot yield accurate results to fit real world situations. 2. The assumption of consistent demand is not true. Demand trends cannot be predicted, and can vary according to day-to-day happenings. ...read more.

Conclusion

Different organization would have different demand patterns. Some organization would have fixed demand and some have fluctuating demands. For example a hostel cafeteria would have the same amount of students everyday but an organization selling computers or compact disc would have fluctuating demands. The same inventory management techniques should not be applied to both constant and fluctuating demand items. With constant demand items, demand tends to be fairly constant and thus an EOQ system would be appropriate. However, items having varying demand would not fit with an EOQ model. Instead, a simulation model would be appropriate. Conclusion In this paper, the classical EOQ model and Simulation model were examined under identical problem situation. It can be seen that EOQ is the most basic model used for inventory control. Though it is not feasible and advisable for complex systems, it is the most fundamental inventory model. The results support that under situation where demand is uncertain or lead-time is prevalent the use of simulation produces better results than EOQ. Every business has its own specific needs, constraints and demand trends; some have constant and some have fluctuating demands. Developing an inventory solution for a business is mainly affected by demands trends, lead time constraints and cost related to inventory. Thus, it may be essential for the organization to analyze their business environments before adopting any procedure or model to formulate an inventory policy. ...read more.

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