Production Management Case Study Reviewing the Inventory Management for Compositemed

Topics: Inventory, Costs, Operations research Pages: 6 (1894 words) Published: March 30, 2011
Production Management Case Study
Reviewing the Inventory Management for CompositeMed

In this report, the aggregated results from the analyses of a different alternatives of inventory policies for CompositeMed company will be presented. Also according to those results, the most profitable alternatives are going to be commented and analyzed more, and then the decision is going to be made about the optimal one which should be suggested to the management of CompositeMed. Additionally, the shortcomings of this analysis are going to be emphasized at the end. The following Table shows the different Scenarios that can be suggested as alternatives of inventory policies to the management of CompositeMed . For each Scenario the Table presents the optimal ordering quantities, Total annual costs and Profits. It is easy to noticed and understand which of them are more profitable from others. *The given Table for the Scenario D shows the NPV ( marginal profit) if CompositeMed accept the offer from its subcontractor to buy jointly EDI communication software which will reduce ordering costs. The calculations for this options shows that this investment is not profitable for the company. Let us markup the three most profitable alternatives respectfully: 1. Scenario B

2. Scenario C
3. Scenario F
Even thought it would be easy to say that the Management of CompositeMed should choose the most profitable option, in other words, the Scenario B, but the closer look of each of Scenario Ordering quantity ( in units) Total annual costs (€) Profit annual (€) Scenario Status Quo TCq= π Scenario A

π= Scenario B TCq= π=
Scenario C
π= Scenario D / TCq= π= -209816,1 ⃰
Scenario E
π= Scenario F TCq= π=
3 Production Management Case Study Assignment 2010(6)
those three alternatives is necessary in order to be that that is a right decision. As it is already mentioned, Scenario B, consider switching to continuous model of reviewing inventories and implementation of the software which causes extra costs, but its implementation generates enough cash to cover that investment. What is more important this new software can actually give a company a competitive advantage and increase customer satisfaction because with this reviewing policy there is no uncertainty about the level of inventories in any point of time, and the service level is higher with the smaller ordering quantity compared to the batch supply ( in case of CompositeMed, because of the restrictive ordering factor, mentioned above) and the maximum inventory level is smaller , too. For the Scenario C, which examine allowing shortages , it is obvious that if company start with that new inventory policy can also generate more profit, but there is one reason why this solution is not recommendable for CompositeMed. Even thought shortages usually happen in real life, allowing for shortages can be very risky because it can have a strong impact to customer satisfaction, and future sales, especially in case of CompositeMed, with the lead time of four weeks. Furthermore it should be clear that the products of CompositeMed are highly specific and the bargaining power of customers is quite strong. For that reason, even though this is one of the most profitable options, it is not suggestible for company CompositeMed. In-house production should also be discussed furthermore in order to better understand the benefits of this option .Switching to in-house production, of course has some advantages. For example, if there is an available capacity in a company, in-house should be a reasonable option. The company is not going to lose the key information like in a case of outsoursing, then the dependence on supplier is decreased which means that the risk that supplier is going to increase prices, or not deliver on time is eliminated. This reasons could be very important for choosing the optimal solution even though the profit of this option...
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