Organizations have to make a decision on how much stock they should buy or hold at any moment in order to meet the needs of their customers. Some of the companies make such decisions with little or no regard about the costs associated with them. Managers need to determine the circumstances under which an order quantity should be considered given that some decisions do not require too many deliberations (Heizer & Render, 2008). The management must ensure that the ordering costs and the holding costs are maintained at their minimum to benefit from optimal stock. It is critical to determine the cost of placing an order and costs incurred to hold stock.
Inventory management is critical to any organization. It helps to control material and goods used for production or exchange purposes. It addresses issues of stock holding by ensuring that an organization does not hold too much stock or too little. Having excess inventory or too small can lead to business failure as the company will be unable to meet the demand of its customers (Heizer & Render, 2008). A manufacturer for example who faces stock-outs of a critical item will have to stop production until the adequate items are available so that production can continue. Stock-outs are likely to drive out customers since they will prefer to engaging other companies that have adequate stock when needed (Choi, 2014). It is critical to managing the inventory of an organization as it can make a significant contribution to the profit and productivity of an organization.
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Economic order quantity involves the selection of an order that minimizes inventory management cost or even time for any item that has a constant demand and such demand is anticipated to continue into the future. It allows the determination of the number of items that must be ordered, when the order should be placed and how the order will be made so that the company can maintain the overall stock. The management must make an optimum investment in inventory to avoid tying down too much capital in the form of excess inventory (Gonzalez & Gonzalez, 2010). EOQ, therefore, plays a critical role in optimizing the resources of a company yet minimizing the associated costs.
The economic order quantity model makes several assumptions in determining the optimum stock that balance between the holding costs and carrying costs. The model assumes that demand is uniform, constant as well as continuous over time. Similarly, the lead time is constant and an organization is not limited as to the quantity it can order at any one given time. Another assumption is that the costs for placing an order do not depend on the size of the order and the cost of holding stock does not depend on the available stock (Chapman, Arnold, Gatewood & Clive, 2016). The following image shows the optimal order quantity that a company should have at any given time. The total costs as shown in the top yellow curve has its lowest point at the point where the order quantity is optimum. If the company orders less quantity than the optimal order, the set up or order cost will be higher any quantity beyond the optimal level will have high holding cost since the company has to provide security, insurance and there will also be damages during storage (Coyle, Langley Jr, Gibson & Novack, 2012).
Economic order quantity in dollars EOQ = √2AB/C
Where EOQ = the most economic order size, in dollars A = annual usage, in dollars B = administrative costs per order of placing the order C = carrying costs of the inventory (%).
How much to Order
EOQ = √2*4000*80/2*(4000/2)
EOQ =12.6= 13 hooks
The location of a new manufacturing facility should be influenced by the raw material status. Pure weight losing materials, for example, must be processed at the source of the raw material since it will be expensive to transport the raw materials to the processing facility located in the market. The manufacturing facility, therefore, must be located near the raw materials and the finished goods are then transported to the market since they are lighter. Pure weight gaining material, on the other hand, needs to be manufactured close to the market. It is easier to transport the raw materials to the facility than transporting the finished goods to the market (Arora 2009; Coyle, Langley Jr, Gibson & Novack, 2012). Bob should, therefore, consider the ideal location of the facility based on the cost of transporting raw material and the finished products. The manufacture of fish bait can be located near the market so that customers can easily access them from the facility. The fish baits are weight gaining materials as many components which are obtained from different suppliers are used to manufacture them. Placing the facility at a central place where raw materials can easily be obtained from the different suppliers and the finished goods can be transported to the market will be ideal for Bob. The raw materials and the finished goods are easier to transport and therefore the location of the facility will be determined by other factors like labor cost, space and legal requirements.
References
Arora, P. (2009). Material management . New Delhi: Global India Publications.
Coyle, J., Langley Jr, C., Gibson, B., & Novack, R. (2012). Supply chain management . Mason, OH: South-Western Cengage Learning.
Choi, T. (2014). Handbook of EOQ inventory problems . Boston, MA: Springer.
Chapman, S., Arnold, J., Gatewood, A., & Clive, L. (2016). Introduction to materials management . Pearson Education Limited.
Gonzalez, J., & Gonzalez, D. (2010). Analysis of an economic order quantity and reorder point inventory control model for company XYZ .
Heizer, J., & Render, B. (2008). Operations management . Upper Saddle River, N.J.: Pearson Prentice Hall.
