Cost Control Management
Running Head: COST CONTROL MANAGEMENT
TITLE: EOQ TRADITIONAL VS DEMAND-BASED METHODS
Cost Control Management (MGMT370 U4) Submission
Facing a tough decision to make, to inform the Global Supply Chain Manager about moving to lean manufacturing and generating profitability improvements including improvements in asset requirements. The information that was given was of inventory and figuring out how to make it more profitable by calculating the changeover in the manufacturing plan, the demand per period along with carrying cost of inventory. Additionally assessing the average cost per unit of inventory. The calculation in a traditional forecast-driven manufacturing, could be complex. Taking into consideration that the ever changing evolution of Global Supply Chain Management affects price and every consumer. Just as there are benefits and costs of globalization, there are similar pros and cons of a global supply chain. In particular, companies need to manage the related risks. With the onset of globalization, managing supply chains has become more complex and business critical than ever before (Milosz M., Oct 4, 2012).
When a company’s operations are under its own control, there are fewer moving parts. As a result, the company has greater access to information. In this type of scenario, it is much easier to identify, quantify, prioritize and mitigate risk for better decision making. In an environment that has become increasingly global in nature, there are more parties involved and less information available at any point in the production process. This makes it much harder to identify, quantify, prioritize and mitigate risk for better decision making (Milosz M., Oct 4, 2012).
There are three major factors that impact supply chain risk: Increasing supply chain complexity, decreasing access to information and greater need for higher quality faster, all for a lower cost. The ability to anticipate and address risk effectively has been severely handicapped by complexity. Now that manufacturers are outsourcing more work to suppliers across the globe and are managing second and third tier suppliers, it has become difficult to track, trace and monitor production (Milosz M., Oct 4, 2012). As companies continue to expand globally, operational decision will be made regardless of whether all the right information is available. Unfortunately, if the proper communication and collaborations systems aren’t implemented, a lack of data correlates directly to an increase in risk (Milosz M., Oct 4, 2012). When organizations don’t have the right information to make an informed decision, a higher level or risk exists that an undesirable outcome will occur (Milosz M., Oct 4, 2012).
Inventory Management also known as Stock Management is a crucial part of Working Capital Management. EOQ is one of the most prominent models used widely for effective inventory management. EOQ calculates the ordering quantity of inventory using inputs of carrying cost, ordering cost, annual usage of the said inventory. Working Capital Management is an important specialized function of Financial Management. Every component of Working Capital such as inventory, debtors or receivable, cash, creditors or payables, short-term debts, etc., needs the effort to manage. This makes its management critical, compared to other working capital components (Sanjay B.B, Aug 31, 2017).
Monthly sales or demand = 1,000 units
Changeover cost = $500
Inventory carrying cost = 30% of inventory cost
Average cost per unit of inventory = $10
How to calculate EOQ in a traditional forecast-driven manufacturing operation. The formula is as follows:
EOQ = sq. root/ x $500(carry over cost) x 1,000(demand) / $10(Average cost per unit) x 30% (0.3 inventory carry cost) = 333,333.333
EOQ = sq. root /$1,000,000 / $3.00 = 333,333.333 = 578units ($5,780)
How to calculate EOQ in a demand-based synchronous manufacturing operation. The formula is as follows:
EOQ = 2 x $10(avg. cost / unit) x 1,000(demand) / $10(avg. cost / unit of inventory) x 0.3(inventory carry cost)
EOQ = sq. root (2 x $10 x 1,000 / ($10 x 0.3))
EOQ = sq. root (20,000 / $3.00) = (81.697units)$6,666.67
Assuming the carrying cost of inventory is 30%, the dollar savings amount of inventory needed is $886.67.
In conclusion, the impact on the company’s overall ROI when switching to demand-based, synchronous manufacturing is very significant. It causes the company to save a substantial amount of money when it comes to calculating numbers for inventory that is in the millions perhaps billions. Significant improvement on inventory, continual fluidity of the manufacturing plant keeping the company competitive in the industry are some of the many factors. Maximization of money coming into the company, reducing inventory and controlling operating expenses, reduces manufacturing lead times. Continuous improvement is key when the demand-based synchronous manufacturing model strategy is employed. Customer requirements and expectations is possible while operating efficiently and with shorter wait time (Jennifer J., 2004).
American Intercontinental University Learning Materials M.U.S.E. Retrieved from
Forbes Magazine Retrieved from https://www.forbes.com/sites/ciocentral/2012/10/04/managingthe-risks-of-a-globalized-supply-chain/#58e37c8839d8
How EOQ helps in Inventory Management Retrieved from https://efinancemanagement.com/working-capital-financing/how-eoq-helps-in-inventory-management
Rezaee, Z. and R.C. Elmore. 1997 Synchronous Manufacturing: Putting the Goal to Work. Journal of Cost Management (March/April):6-15 Retrieved from https://maaw.info/ArticleSummaries/ArtSumRezaeeElmore97.htm