ABC Analysis Of Inventory Management, Economic Order Quantity Calculation, And Essay.

Overview of ABC analysis of usage value in Waterside Medical (WM)

1. Prepare a Spreadsheet-Based ABC Analysis of usage Value

The table below shows the ABC analysis of usage value in Waterside Medical (WM). A represent items which accounts for 20% of the items that make up the usage value, B-represent items, which account for 30% of the usage value, and C represents items which account for 50% of the usage value, along with their respective percentages of usage value. 

 

 

 2. Calculate the inventory weeks for each item, for each classification, and for all the items in total. Does this suggest that the operational manager’s estimate of inventory weeks is correct?

To calculate the amount of inventory available Stock Cover was used. It is obtained by dividing the Stock by the demand then multiplying by the number of weeks. i.e.  (Stock / Demand) * 52. There were 52 sales weeks in the base year, according to the assumptions made. Inventory weeks for each ABC classification are calculated by multiplying the sum of the Last 12 Months' Sales divided by the sum of category sale) by the number of Stock Covers in the classification. We can acquire the number 14.49 by repeating the process on inventory weeks for all goods in total. Inventory weeks are calculated as follows,

 (Assuming 50 sales weeks / year) stock cover = (stock / demand) * 50 

 

As predicted by the Head of Operations, the total number of inventory weeks will be ten (ten). The total number of inventory weeks, as computed in the prior study, is nine and a half months. Aside from that, the data indicates that the inventory weeks for Class A, B, and C are 8.9, 6.0, and 34.3 weeks in duration, respectively. This shows that the Head of Operations' estimate for Class A inventory was reasonable, and that his estimate for Class B inventory was also reasonable, but that his estimate for Class C inventory was incorrect. The fact that Class A inventory accounts for around 80% of inventory utilization (measured in terms of sales value) does not diminish the reality that Class C products account for a considerable amount of the overall investment in stock. In addition, because Class C inventory contains slower-moving products that are more likely to remain in stock for a longer period than Class A inventory, forecasting mistakes associated with Class C inventory pose a greater risk than forecasting problems associated with Class A inventory. According to operational managers, it is expected that normal inventory cover will be 10 weeks, which is lower than the predicted inventory cover of 14.49 weeks.

3. If so, what is your estimate of the overall inventory at the end of the base year, and how much might that have increased during the year?

Waterside Medical (WM) now has approximately 4,000 items in its warehouse. By multiplying 20 preventative items by 20 (20:4000), we may have an overall inventory of around 15.9 million dollars at the conclusion of the base year, which we then add to the current year's total. This year's inventory is expected to expand by a quarter of a percent above last year's level, as well as another possible scenario: the value of the company's stock grew at a similar pace to last year (25 percent) Inventory at the end of the year is (99372*200) -15899600 = 3974800, which is nearly €3.9 million in today's money, compounded by 25 percent. B: The value of the inventory has increased since last year (35 percent) 107,322 * 200 - 15,899,560 = 5,564,900 = 35% increase in inventory value a rise in the value of stock A 35% increase in inventory would have translated to an increase in inventory value of €5.5 million. 

Calculation of inventory weeks and comparison with operational manager's estimate

4. Based on the sample, analyse the underlying causes of the availability problem described in the text.

The company's inventory ordering practices are clearly having issues, as is evident. This problem can be alleviated, in our opinion, by establishing a strict ABC stock control method.

• The fact that the ROQs and ROLs, or existing reorder levels, had not been updated for many years was one of the underlying causes of the availability problem. However, present usage was not considered (Nuzhna, et al., 2019). It is possible that certain products are no longer in use, while others are used daily.
• While their ROQs were based entirely on expected sales, this isn't always the best or only way to assess a company's success.
• Catalogue reference number 12979 sold 120 units in a year, but there was still an inventory of 160 units left, and yet 500 units were requested. It's probable that their reorder quantities are a touch excessive.
• This means that Waterside Medical (WM) has extra inventory in some locations, but is out of supply on others, such as their SKUs (stock keeping units).
• As customer satisfaction declines, their return on investment suffers because of their big inventory, which is costing them 15% of annual revenue.
• There are a wide variety of supplies available to medics, which is convenient. Despite having an average inventory cover of ten weeks, they are still having supply challenges with their products.
• Due to the large variety of products, there are also a wide variety of requirements. Some of their products are in high demand, while others are in extremely low demand.
• We used the ABC item categorization system to identify the most in-demand items and then labeled them accordingly.
• Because of this, the availability issue can be solved by estimating the average inventory cover based on item categorization and ordering accordingly.

In addition, its cycle-counting methods will profit from the ABC concept. The ABC technique is used to identify and grade several aspects of the activity. Since C-items have the greatest impact, the ABC theory requires that they be counted frequently. Consequently, management may concentrate their efforts on the most important aspects of the business. Lowering inventory levels of a few key commodities that have a significant impact on inventory turns and total value. Decisions about inventory management are frequently complex, requiring input from numerous different management divisions (Selvaraju and Murugesan, 2021.). Priority should be given to resolving customer service issues before pursuing monetary and operational gains. For Waterside Medical (WM) to meet their goal of providing low-cost medicine that is delivered quickly and on schedule, they must understand what their members like and maintain the right inventory levels. Waterside Medical (WM) must take service responsibilities and the ABC principle into account to sustain overall corporate efficiency.

5. Calculate the Economic Order Quantities (EOQs) for the A items.

EOQ = Economic Order Quantity

EOQ = √ [2 * (ordering cost) * (demand per year)] / carrying cost

• Order cost = 50 Euros
• Holding cost = 15% of order cost = 0.15 x 50 = 7.5 Euros 22

Non-integer values, such as decimals or fractions, are far more common than integer numbers in the EOQ column in the table above. In many circumstances, the minimum order amount is onerous or impossible to meet. If a company wishes to purchase a Sequential Comp. For instant, for a Pump, it can only do so by purchasing the entire pump or nothing at all. In any case, after a suitable EOQ has been established, the operations manager can determine the most convenient order quantity and compare it to the alternative order quantity to see which one is less expensive (Alfares and Ghaithan, 2019). The cost difference is derived by deducting the overall cost of the EOQ from the recommended convenient amount to arrive at the cost difference. Most of the time, the cost difference between the two approaches is negligible.

6. What recommendations would you give to the company?

As previously indicated, the introduction of a tight ABC stock management system would be advantageous to the organization in terms of improving inventory ordering practices while also lowering costs and increasing efficiency. Inventory management in general, on the other hand, will experience major improvements because of the adoption (Nallusamy, Balaji and Sundar, 2017). Inventory management has a significant impact on a variety of aspects of a company's operations, including the ability to sustain a competitive advantage. Following the adoption of this ABC analysis system, the number of stock outs will be decreased, as will the handling expenses of inventory, which may result in a lower price for the product and increased dependability for the company because of its implementation. Everything about this will add to a larger competitive advantage in the marketplace, so pay attention! We believe that the firm should also update the reorder quantity (ROQ) and reorder levels (ROL) on a regular basis, which will be beneficial to the company in the future. This is an area that need significant improvement, and we believe that it is a contributing reason to many of the problems the company has experienced in the past regarding inventory levels (Nobil, Sedigh and Cárdenas-Barrón, 2020). A frequent inventory assessment on a quarterly or biannual basis would allow for any extra A, B, or C goods to be accounted for in the inventory management process, as well as for changing demand on current products, which might otherwise be overlooked if the inventory management process was not performed on a regular basis. For example, a supply chain that is inefficient is characterized by frequent stockouts, high inventory management costs, and dissatisfied customers, among other characteristics. Ultimately, the goal of a supply chain is to ensure that the proper number of commodities is available at the appropriate time, in the suitable place, and at the acceptable price. Waterside Medical (WM) routinely fails to deliver a high level of service that is consistent in its quality and timeliness. As a result, we urge that the organization include information sharing into all aspects of its supply chain to the maximum extent practicable. Considering the current condition of affairs, it is impossible to overestimate the significance of information transmission (Kvon, et al., 2017). Countless studies have been conducted on the need of transmitting timely and useful information along the supply chain, with conclusive findings in each. It has been shown that sharing information can result in a better understanding of how supply chain activities are performed, an insight into potential problems, improved visibility of the supply chain in terms of supply and demand forecasts, and improved visibility of the supply chain in terms of the current issues Waterside Medical (WM) is experiencing. Additionally, information exchange can help to reduce inventory inaccuracies, whereas information distortion can increase them (Alfares and Ghaithan, 2019). To optimize their inventory management system, the organization should look for suppliers who have ERP/EDI systems in place. These systems will allow for the easy and consistent interchange of information between the two parties. We feel that sharing information with suppliers will assist them in analyzing their own manufacturing capacities to fulfill the rounded EOQ volumes that we expect.

• It is necessary to implement a capacity management strategy.

Due to a lack of supply and a lack of supply at the same time, it appears that demand can't be accurately predicted. Using a "chasing demand" strategy is the best approach to ensure that production matches demand. This strategy can lead to an increase in backlogs and a decrease in customer satisfaction. A shift in demand in the medical supply industry can be difficult.

• It is possible to classify commodities into high, medium, and low-value groups using the ABC method.

When making decisions, this will allow for more accurate demand forecasting and consideration of manufacturing time (Khan, Dong, and Yu, 2017). Examples of high-value products include sequential pumps and incontinence pads that account for a considerable amount of the stock's value.

• Our current supplier does not take online or edit orders as a cost-cutting measure.

Reducing reorder/admin costs and providing improved customer service can both be accomplished by using the weighted supplier strategy. Based on real sales data, adjust ROL and ROQ Since lead times and demand are unpredictable, they'll need to check their inventory frequently to figure out how much safety inventory they should keep on hand while keeping their costs low. 

References

Alfares, H.K. and Ghaithan, A.M., 2019. EOQ and EPQ production-inventory models with variable holding cost: state-of-the-art review. Arabian Journal for Science and Engineering, 44(3), pp.1737-1755.
https://link.springer.com/content/pdf/10.1007/s13369-018-3593-4.pdf 

Khan, S.A.R., Dong, Q.L. and Yu, Z., 2017. Role of ABC Analysis in the process of efficient order fulfillment: Case study. In Advanced Engineering Forum (Vol. 23, pp. 114-121). Trans Tech Publications Ltd.
https://www.proquest.com/docview/2198643911?accountid=12834&pq-origsite=primo 

Kvon, G.M., Lushchik, I.V., Nikolaeva Yu, V., Nuretdinova Yu, V., Azitov, R.S. and Pavlushin, A.A., 2018. ABC-analysis technique of regional industrial investment development: theoretical and practical aspect. Revista ESPACIOS, 39(22), p.14.
https://www.revistaespacios.com/a18v39n22/a18v39n22p14.pdf 

Nallusamy, S., Balaji, R. and Sundar, S., 2017. Proposed model for inventory review policy through ABC analysis in an automotive manufacturing industry. In International Journal of Engineering Research in Africa (Vol. 29, pp. 165-174). Trans Tech Publications Ltd.
https://www.proquest.com/docview/1875945811?pq-origsite=primo&accountid=12834 

Nobil, A.H., Sedigh, A.H.A. and Cárdenas-Barrón, L.E., 2020. Reorder point for the EOQ inventory model with imperfect quality items. Ain Shams Engineering Journal, 11(4), pp.1339-1343.
https://www.sciencedirect.com/science/article/pii/S2090447920300538/pdfft?md5=993a1a1c466855c26d9074ce11796cb2&pid=1-s2.0-S2090447920300538-main.pdf 

Nuzhna, O., Tluchkevych, N., Semenyshena, N., Nahirska, K. and Sadovska, I., 2019. Making managerial decisions in the agrarian management through the use of ABC-Analysis tool. Independent Journal of Management & Production.
https://www.proquest.com/docview/2247510724/fulltext/785A9258C490420BPQ/1?accountid=12834 

Selvaraju, K. and Murugesan, P., 2021. ABC analysis using Particle Swarm Optimization and its performance evaluation with other models. Benchmarking: An International Journal. 
https://www-emerald-com.northampton.idm.oclc.org/insight/content/doi/10.1108/BIJ-11-2020-0594/full/pdf?title=abc-analysis-using-particle-swarm-optimization-and-its-performance-evaluation-with-other-models