Operations Management: Inventory Management and Sales Forecasting

OPERATIONS
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
REFERENCES................................................................................................................................1

Question 1
(a) Discussion of purchasing and shortage cost associated with inventory management
Aside of ordering and holding cost, the two cost which is need to be address by the
company for the management of the inventory includes purchase cost and opportunity cost.
 Purchase cost: The purchase cost is the cost which company will incur while ordering
and purchasing the annual requirement of raw material. The purchase price plays
important role in this because the purchase price of the raw material change and also
affects the holding cost of the inventory. The purchase cost also involves the purchase
price of the raw material, the production cost if such material is produced within the
organisation. The price may remain constant and also vary depends upon the number of
quantity of raw material.
 Opportunity cost: This is another cost which is important and associated with the
company inventory management. This cost involves the other cost which the company
will lose in term to keep this plan in active. The opportunity cost involves the range of
investment alternatives, lack of capital availability that they need to invest in alternatives
and related cost to the overall role of inventory within the logistic system. This cost play
important role in deciding the optimal quantity that company need to order at a particular
point of time.
(b) Calculation of total cost of Plan A and Plan B
Particulars Plan A Plan B
Order Quantities 200 Units 50 Units
Annual Demand 350 Units 350 Units
Holding cost per unit £0.8 £0.8
Ordering cost per order £12.5 £12.5
No of order placed in a
year
350 / 200 = 1.75 orders 350 / 50 = 7 orders
Average Inventory 200 / 2 = 100 units 50 / 2 = 25 units
Calculation of Total cost of Plan A and Plan B

Particulars Plan A (£) Plan B (£)
Ordering cost per order 21.875
(1.75 orders * £12.5)
87.5
(7 orders * £12.5)
Add Carrying cost of
average inventory
80
(100 units * £0.8)
20
(25 units * £0.8)
Total cost 101.875 107.5
Comment on most preferable Plan:
On the basis of the total cost calculation of the Plan A and Plan B, it is recommended to the
company that they should opt for the Plan A because here the total cost of ordering and holding
the inventory of 200 units is low as compared to the units of 50. Basically, both plan is not good
for the company because the total ordering cost is not equal to the total holding cost in neither
Plan A nor in Plan B. But as the total cost is lower in the Plan A thus it is preferable to the
company that they should order 200 units of raw material at a single time to meet the annual
requirement of 350 units.
(c) Explanation on the difference of both plan total cost along with the reason of why difference
occurs
Plan A and Plan B total cost are different from each other. It is because the total ordering
cost and total holding cost of both the plan is different. This difference is arising because of the
various reason which are as follows:
 No of quantity order: The number of quantity order by company in each of Plan A and B
are different which leads to different no. of order. The difference in the number of order
has result into the different ordering cost per order despite of being the same cost of
ordering.
 Average inventory: The total cost of Plan A and Plan B is different from each other
because of the average inventory used in the production. The average inventory is further
used for the calculation of inventory cost for average inventory which is leads to
difference in the total cost.