Parts Emporium had witnessed intense growth in its early phase. However, with an increase in its capability to hold or deal with enhanced inventory levels, the company observed a slow growth or stagnancy in its growth. Currently, Parts Emporium is facing different problems with the inventory management system for its two products. Firstly, the company wants to compute the benefits by shifting from current to economic order quantity model of inventory management. Secondly, the issues like inventory cycle, inventory shortage and safety stock requirement also need to be answered. Currently, the company is facing stock shortages, avoidable inventory holding and ordering costs. All these costs need to be optimized by taking into consideration the overall demand for the coming year.
Firstly, the total annual cost arising from the prevalent inventory management system need to be ascertained. These costs are a combination of ordering costs, holding costs and cost of backdrops. The following two tables depict the detailed calculations for the computation of total inventory costs under the current system.
Table 1: Cost Analysis for EG151
Table 2: Cost Analysis for DB032
Parts Emporium is under a dire need to reform its inventory cost structure. For this purpose, the Economic Order model or EOQ inventory management system best suits its demand as it minimizes the costs for the holding and ordering of inventory. In this regards, Appendix A constitutes detailed calculations for the relevant costs under the EOQ inventory management system for both the products. Alongside the costs, the safety stock requirement of the products is also taken into account. The summary of the findings is shown in the following table.
Table 3: Summary of Cost Analysis
Note: Appendix A contains the detailed calculations for each feature of the table.
The data shows that by implementing the EOQ inventory management system, Parts Emporium can save up $503.64. This will represent a total cost reduction of 35%. Apart from the cost reduction, the inventory cycle of Parts Emporium is also strengthened as it experiences a total reduction of 282. However, for item EG151, the inventory cycle figures are unfavourable. However, as both the ordering and holding costs have decreased, therefore, the 100.91 unfavourable inventory cycle figures can be overlooked. On the other hand, the item DB 032 shows favourable decrease in holding costs and inventory cycle. However, the ordering costs for the product have risen in the wake of the new EOQ model. However, before embarking on the decision of rendering EOQ unsuitable for DB032, one point should be kept in mind, DB032 is a new product and as the time progresses a change in suppliers may take place. Moreover, the dynamics of the future can also decrease the ordering costs because the demand can go high and the size of the standard lot can also be increased by virtue of efficient bargaining.
The new inventory management system cannot enhance the profitability or decrease substantial inventory costs in weeks. As the system gets implemented, the subsequent changes in the dynamics of the supply chain may allow Parts Emporium to save even more. Regardless of all the theoretical aspects, the quantitative analysis has shown that EOQ inventory management system tends to save the holding costs by 35%. This is a substantial decrease in the cost if one takes into account the nature of the business and the gross margin percentages and absolute margin figures. Hence, it is certainly recommended that Parts Emporium should implement EOQ model by the earliest date. Not only the costs will be saved but the stock shortages will also be tackled by implementing cautious safety stock requirement. It is obvious that some aspects will not always back the implementation; however, both the products should be accounted for using the EOQ system because the positive side effects in the future tend to overweight the negative aspects.
Detailed Calculations under the EOQ Inventory System for EG151 and DB032