"The World is Flat"

I recently watched a presentation by Thomas Friedman, the author of the book "The world is Flat."

Friedman described the 10 ways he believes the world has become flatter and how this will effect us in the coming years and decades. Friedman discusses how countries, the companies, and now individuals have gone global.

Friedman's ideas have been influential in the business community and shed light on new issues that companies must learn to face in order to remain successful in the "flatting world."

These facts are relevant to inventory management because of the continued growing network of suppliers and customers all over the world. "Work in progress" and "finished goods" inventory are now located all over the world, in transit to the next location, and beings stored waiting on demand. Managers must be aware of this inventory, and control the risks associated with holding large amounts of inventory.

"Stockout Costs and Consequences"

I recently read an article in the APICS magazine entitled "Stockout Costs and Consequences, Irritated customers or idle inventory?" In the article John Van Vliet, P.H.D., Associate Professor at Shorter College in the School of Business Management, was interviewed. He is currently doing research to assign cost to potential stockouts as well as establishing the pros and cons associated with inventory holding costs opposed to the risk of a stockout. He says, "A stockout will generate a chain of costly events, and it's hard to assign costs to that chain and hard to know when to stop moving along the chain." A stockout can absolutely change customer demand resulting in the cost of lost sales as well as cost values resulting from halting production. Stockout costs can actually be much more tremendous than we actually give it credit. Dr. Vliet makes a valid point in the article when he says, "And when you think about all the time, money, and effort we spend trying to attract customers, isn't it silly to say we're going to fine-tune our inventory controls and accept a higher degree of risk of disappointing our customers in order to save a few hundred dollars here and there?" Instead of using the ABC analysis for usage rates, Dr. Vliet wants to know "Which items are the real showstoppers?" He wants to know which items have the potential to hurt the worst if a stockout occurred. Dr. Vliet says that based upon what you promise your customer and how your customer views an item, even typical C items can turn out to be very critical. For important items reorder points should be adjusted higher to ensure that a stockout will be avoided. Dr. Vliet feels that by properly quantifying stockout costs and implementing an EOQ that incorporates stockout costs, purchasers would be able to do a better job of ordering the optimal quantities to help keep the right balance between keeping on hand inventory and the risk of a stockout.

The Holiday Season

Retail outlets are facing a glooming economy as the holiday season rapidly approaches. Stores such as Macy's, Sacks, and JCPenny have all announced declining sales and expect an exceptionally slow holiday season. Consumers are being forced to spend more of their income on fuel and other essentials are left with less to spend on luxury goods.

Decreasing sales forces these retails to focus on minimization of cost. Macy's said this week that it was able to maintain cash flow that was "stronger than it expected at the start of the year, because of cost cutting and inventory management."

Other retailers must follow suit by cutting cost to try to salvage what is left of this years holiday surge.

Thoughts

“Traditional inventory management techniques may underemphasize the costs of maintaining large inventories. JIT may under-emphasize the costs of not maintaining inventories, particularly since such costs are often difficult to identify and measure”

“Most manufacturers ignore some relevant and important costs associated with carrying inventory, and thus do not calculate EOQ lot sizes correctly. He argues that correct usage of the EOQ model will result in lot sizes that closely approximate JIT lot sizes”

The two quotes above stood out to me as I read the article comparing the costs of EOQ to JIT purchasing. EOQ purchasing means optimizing inventory levels based on minimizing costs even if that results in having a lot of inventories on hand. Using EOQ we assume that the holding cost we use to find the optimal order quantity will keep a natural balance since we are trying to minimize our costs. JIT purchasing is of the idea that the minimal amount of inventory necessary is the optimal quantity and of course minimal inventory will reduce costs. The article is of the idea that if costs are calculated correctly for the EOQ model then it will find the lowest amount of inventory to be the optimal order quantity which is an overlap of the EOQ model and JIT.

The article also states that the amount of annual demand has a significant effect on the total cost associated with the purchasing models when used separately. I found the graph below (similar to the graph in the article) which shows how annual demand is influenced by the difference between total cost for EOQ and JIT. The consensus is that for lower annual demand JIT would be best and for higher annual demand the EOQ model does the best to minimize costs. I think the main point of the article is that for the EOQ model to be most effective the calculations of holding and setup costs should be extremely thorough and if done correctly it will return the lowest optimal order quantity (imitating JIT) for the lowest total cost.

Source for the graph: http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050310203.html