Discussion – Inventory Planning

Discussion – Inventory Planning

Benefits of Using the EOQ Method

The use of the EOQ method has various benefits. First, the method allows an organization to improve overall efficiency regarding various matters, such as making better decisions regarding managing and storing inventories. It ensures that businesses order the number of actually needed products and not the amount they feel they need. Second, the method minimizes stock-outs (Shaikh et al., 2019). It allows businesses to calculate the reorder level upon which orders are made. That way, no stock-out can be recorded. Finally, the method assists in reducing inventory costs. For example, when extra inventory is stored, costs can accrue on security, damage, and spoilage.

Significance of the EOQ (Q*) and the ROP

Economic Order Quantity (EOQ) is significant to any organization because it helps in the efficient management of inventories. Arguably, a company will tend to hold too little inventory during periods of high demand and too much inventory during periods of low demand. Notably, problems can arise out of this and lead to losses. However, EOQ allows appropriate amounts of inventory at varying levels of demand. Similarly, reorder point (ROP) is significant because it facilitates effective inventory management. It helps avoid lost sales by ensuring sufficient stock is available in the inventory balance, preventing overstocking and overstocking, and saving holding costs.

Importance of Determining the Standard Deviation of Demand to Calculate Safety

Stock

Calculation of the standard deviation is necessary to establish safety stock. Safety stocks ensure the negative consequences of not having enough stock. Safety stocks protect a business from lead time uncertainty and demand uncertainty. Notably, the two are external factors that are difficult to determine with certainty. Consequently, the importance of standard deviation comes in because it helps to factor in the multiple uncertainties involved in the calculation (Liao & Deng, 2018). It helps indicate the extent of deviation involved regarding lead time and demand. The two are essential, with the latter playing a critical role in determining the minimum inventory and safety stock requirements. At the same time, the former ensures that not large amounts of safety stocks are kept because demand and supply may vary from one product to another.

The Application of EOQ in Saving Money on Inventory Costs

The application of the EOQ model enables organizations to ascertain the ideal quantity of goods to order, which are most beneficial when ordered in a single order. Higher inventory costs will accrue to a firm when very few products are ordered at one time due to higher total ordering costs (Liao & Deng, 2018). The model helps reduce these higher costs and thus saves costs for a company. Also, the model plays a crucial role in lowering or eliminating holding and storage costs. It also helps avoid extra inventory in the warehouses, producing unwanted costs such as damages, security, handling-related costs, and spoilage.

Disadvantages of the EOQ Method

Despite saving costs for firms, the model has a share of limitations that intensely arise from its assumptions. The model assumes fixed costs for holding charges, ordering charges, and inventory units. Further, the model assumes a steady demand for business products and the immediate availability of items required for restocking (Shaikh et al., 2019). However, it is a matter of fact that this is not the case at all times because economic or seasonal fluctuations occur. For this matter, the model is susceptible to criticism for making unrealistic assumptions.

References

Liao, H., & Deng, Q. (2018). EES-EOQ model with uncertain acquisition quantity and market demand in dedicated or combined remanufacturing systems. Applied Mathematical Modeling, 64, 135-167.

Shaikh, A. A., Khan, M. A. A., Panda, G. C., & Konstantaras, I. (2019). Price discount facility in an EOQ model for deteriorating items with stock-dependent demand and partial backlogging. International Transactions in Operational Research, 26(4), 1365-1395.

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Discussion – Inventory Planning

Instructions

In 400-500 words, write a comprehensive summary discussing the inventory plan. In your discussion, address the following:

1- What are the benefits of using the EOQ method?

2- What is the significance of the EOQ (Q*) and the ROP?

3- Why is it important that we determine the standard deviation of demand to calculate Safety Stock?

4- How does using the EOQ help save money on inventory costs?

What are some of the disadvantages of the EOQ method?