"Operations managers are extremely concerned with reducing the amount of inventory held in their organization (Swink, Melnyk, Cooper, & Hartley, 2011)." The reason for this concern is that the managers don't want too much inventory sit dormant and they don't want to run out of a product that could cost them customers. The reason why managers don't want inventory sitting dormant is because of the amount of money that becomes dormant with it. This is referred to as opportunity cost.
Opportunity cost is defined as "The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action (investopedia.com, 2012)." In this case the purchasing of the extra inventory that is not being sold or used is costing the organization to use those funds somewhere else where they could be needed. Traditionally the way that managers would handle this problem is by looking at the inventory turnover. In a recent article though it states that "Inventory turnover ratios produce information that is: Too little, too late, and too distorted (Howardell, 2012)."
Planning inventory is both a science and an art do to the fact that it is based on both mathematic formulas and gut feelings that are based on trend analysis. "Our experience shows that the math is not enough to be a highly successful inventory manager over the long run. Instead, dealers with a long history of success with inventory and high turns over many years seem to have developed an extra sense, a "feel" for the market (Spader Business Management, 2009)."
If I was to try to reduce the inventory in Kropp Well Drilling Inc. without negatively affecting the customer service, I would first start with updating to a computerized purchasing system. This would allow the company to not have to make long unnecessary calls to the company's supplier's salesmen. This would also cut back on the time it takes for the salesman for trying to push new products or try to upgrade the products requested while on the phone with the supply manager.
The second thing I would do is to implement a supply tracking system that doesn't only tell me the total number of stocked inventory but information about where and when the product was used and how often and how much does each type of job average on supplies. This will allow for us to track employee usage of the product and would help stress restrain when using such products like electric tape and soldering rods. The type of system that I would hopefully implement is a barcode system that works with the Global Trade Item Number (GTIN). This would allow for easy scanning of the pumps, motors, drilling pipe and other materials that have to already conform to the bar codes by their manufactures. (Swink, Melnyk, Cooper, & Hartley, 2011)
I would also try to avoid the bull whip effect as summer is our busiest season, I would plan a larger inventory for the spring and a much smaller inventory come end of august when the season begins to slow. This would lower the amount of inventory that the company has to sit on through the winter. The end result of this is an increase in opportunity for the company to invest that money elsewhere during the slow season of fall and winter.
After the data for a single year is analyzed then I can effectively cut back the inventory on a month per month bases or a season to season basis so not to interfere with customer service and response time. This will allow us to still remain competitive and offer the products when required but we will not have 5 to 10 sitting unused when winter comes as we currently have.
The example given is the exact reason why many people often claim that management is as much of an art as it is a science. There are so many variables that have to be planned around and considered when dealing with all aspects of management, and particularly with inventory. As discussed above, opportunity cost is a big issue with excess inventory, but inventory becoming obsolete before it can be used and the costs associated with inventory are also an issue.
Many companies that don't have ...
Operations managers are extremely concerned with reducing the amount of inventory held in their organization