Business Analysis Paper
Nigeria Hunter
3/25/2013
Business Analysis
Inventory Simulation: ABC Company When given this assignment, I began to make my assumptions about which option would be the best option. I did not take much thought into these guesses. They were just surface choices. I assumed that ordering 180 units would be the best option and ordering 170 units would be the worst option. All of my assumptions turned out to be incorrect.
Knowing the range of possible demand, I expected that ordering 180 units would be the best option. Another reason that that 180 units of inventory resulted in such poor profit is that holding costs exceed the cost of lost sales by $3. This means that the cost of holding an item in inventory costs more than losing one unit of sale. In essence, it would be better for profit to lose a sale rather than to continue to hold increasingly large amounts of inventory in its warehouses.
Given that demand could be anything from 150 units to 200 units, I anticipated that maximum lost sales would equal to 20 units and maximum excess inventory would equal 30 units. I did not take into account that, in addition to ordering inventory, ABC Company would be holding inventory as well. This became evident in the weekly inventory model for 180 units of inventory. Probability-wise, there is a greater chance of having excess inventory than lost sales when order quantity is 180 and beginning inventory is zero. Therefore, in most years, the first few weeks produced excess inventory. This would lead to a piling up of excess inventory. For example, if beginning inventory for week one is zero units and demand is 160 units, there will be 20 units of excess inventory. If the next week, demand was only 150, excess inventory will increase to 50 units. Even if demand is 200 units, there will be excess inventory because current inventory before sales will be 230 units (50 units of excess inventory plus 180 units ordered). As excess inventory continues to increase, demand will
3/25/2013
Business Analysis
Inventory Simulation: ABC Company When given this assignment, I began to make my assumptions about which option would be the best option. I did not take much thought into these guesses. They were just surface choices. I assumed that ordering 180 units would be the best option and ordering 170 units would be the worst option. All of my assumptions turned out to be incorrect.
Knowing the range of possible demand, I expected that ordering 180 units would be the best option. Another reason that that 180 units of inventory resulted in such poor profit is that holding costs exceed the cost of lost sales by $3. This means that the cost of holding an item in inventory costs more than losing one unit of sale. In essence, it would be better for profit to lose a sale rather than to continue to hold increasingly large amounts of inventory in its warehouses.
Given that demand could be anything from 150 units to 200 units, I anticipated that maximum lost sales would equal to 20 units and maximum excess inventory would equal 30 units. I did not take into account that, in addition to ordering inventory, ABC Company would be holding inventory as well. This became evident in the weekly inventory model for 180 units of inventory. Probability-wise, there is a greater chance of having excess inventory than lost sales when order quantity is 180 and beginning inventory is zero. Therefore, in most years, the first few weeks produced excess inventory. This would lead to a piling up of excess inventory. For example, if beginning inventory for week one is zero units and demand is 160 units, there will be 20 units of excess inventory. If the next week, demand was only 150, excess inventory will increase to 50 units. Even if demand is 200 units, there will be excess inventory because current inventory before sales will be 230 units (50 units of excess inventory plus 180 units ordered). As excess inventory continues to increase, demand will