The Science and Strategy of Inventory Control

An inventory and its management

An inventory is a record of goods and property a business has in stock with the intention of being sold. In most cases, companies record the changes in the inventory on a daily basis so as to monitor whether the company is getting loses or profits. Individuals always assume that the goods and products in an inventory are subject to a known demand. However, there are special cases where the goods and products in an inventory are subject to unknown demand.

Understanding demand for unknown inventory

Demand is the amount of goods and products that the consumers are willing to purchase for various prices over a certain period. Inventory subject to an unknown demand consists of goods and services whose prices are not fixed and those that the consumers have not established a proper purchasing pattern. Products that are new in market mostly have an unknown demand. Uncertain demand always leads to the risk of incurring loses if the inventory is not carefully managed. The main objective of inventory management is to reduce the expected cost and increase the expected profits.

Inventory management for perishable goods

Even though the demand of some products might be unknown, the business manager can always predict the estimate expected demand over a certain period of time. They include; perishable products and stable products. Perishable goods with unknown demand include the goods that can be valid for only a short period of time and have an uncertain demand. These goods may include fresh fruits, flowers and even fresh foods. When coming up with inventories for perishable goods with unknown demand, there are models and trade-offs that must be considered. The most appropriate model is the Bayes’ model. The main aspect of this model is decision analysis on the number of units to order (Chen et al. p. 118). In this model, the business personnel come up with a decision that maximizes the expected profit. This decision is achieved through estimating the possible daily purchases then deciding on the best number of daily sales. Deciding on the best number of daily sales prevents one from ordering excess goods that cannot be sold. The unsold goods always increase the amount of loses in a business.

Inventory management for stable products

On the other hand, stable products are goods that can remain valuable in market for a very long period of time. Such goods may include; building materials, toys, furniture and utensils. Coming up with an inventory for stable products with unknown demand is quite a difficult task for a business management. In this case, the Economic Order Quantity (EOQ) will be the best model. This model is the best as it allows the company to approximate the most appropriate number of goods to produce so as to reduce the cost of production (Sadler, p.51). The production of a reasonable number of goods helps in reducing both the number of goods that remain unsold and the cost of production. By doing this, the company is able to reduce the amount of loses incurred. For example, a company that used to produce 50,000 pieces of iron sheets monthly only sales an average of 20,000 pieces and the cost of production is about $ 2 million. When this company decides to reduce the number of iron sheets produced to 30,000, the cost of production will reduce to an estimate of $1million. When the cost of production and number of goods that remain unsold reduces, the amount of loses will also reduce.

Recommendations for stabilizing demand

For companies to stabilize the demand of their products, they should ensure they deliver all the customer orders in time. Time management is the key issue in business. When the company delivers the orders in time, they consumers will gain trust in the company and therefore continue using their products. Another recommendation is that companies whose products have unknown demands should provide incentives to their consumers. Providing incentives such as reduced costs for consumers who purchase a large amount of goods will help in stabilizing the demands for the goods and products. This is because these particular consumers will be encouraged to make their purchases from that company from time to time.

Conclusion

In conclusion, inventories subject to unknown demands are quite delicate in the sense that if not carefully handled they might lead to large amount of loses. It is these loses that lead to failure of a business. Therefore, in avoiding such loses when dealing with inventories of unknown demands, companies must go an extra mile of using specific models to come up with inventories. There are two types of goods that can have unknown demands, these are the perishable goods and the stable goods. Despite the fact that both of these category of goods have unknown demands, they must be treated differently. The best model for designing an inventory for the perishable goods is the Bayes’ model which mainly deals with decision making. On the other hand, the best model for coming up with inventories for stable goods is the EOQ which deals with the number of goods produced. If properly and carefully handled, inventories subject to unknown demands cannot be of great lose to a business.

Work Cited

Chen, Ming-Hui, Peter Müller, Dongchu Sun, Keying Ye, and Dipak K. Dey. Frontiers of         Statistical Decision Making and Bayesian Analysis: In Honor of James O. Berger. New   York, NY: Springer Science+Business Media, LLC, 2010. Print

Sadler, Ian. Logistics and Supply Chain Integration. Los Angeles: SAGE, 2007. Print