Answer to Question #292280 in Management for george2000

Question

The daily demand for a product in a shop can assume one of the following

values: 100, 200, or 300 items with probabilities 0.2, 0.5 and 0.3. The owner of the store is thus limiting the alternatives to stocking one of the indicated three levels. If the owner stocks more that it can be sold in the same day the remaining items must be disposed at a discount price of 50 cents per item. Assume that the owner pays 80 cents per item and sells it for 120 cents, find the optimal stock level.

Answer 1

The potential benefits of the application of inventory management concepts are many

and include the following:

1. Provides both internal and external customers the required service levels in terms of quantities and the order rate fill (timing).

2. Ascertains present and future requirements for all types of inventory to avoid overstocking or under- stocking.

3. Keeps costs at the minimum by variety reduction, economic lot sizes and analysis of costs incurred in obtaining and keeping inventories.

4. Provides upstream and downstream inventory visibility or service in the supply chain.

→ In order to reap these benefits, inventory management requires an effective organization and sound communication among supervisors and managers.

This is because various functions conflict making it difficult to have a harmonious way of enjoying the above benefits e.g. 

1) Purchasing, in an attempt to maintain low cost may choose vendors who have poor delivery records (time, quality). This may have a potentially ve effect on the production.

2) Production on the other hand may require large adequate supply of materials.This may lead to maintaining high inventory levels than necessary.

Therefore, due to these potential conflicts, it is necessary to deliberately set up rationalized inventory management systems.