Taylor Incorporated Inventory Management Challenge

Taylor Incorporated Inventory Management Challenge

Inventory is a company's form of insurance against supply chain uncertainty. "Companies cope with this uncertainty and try to avoid delays with their own form of insurance inventory" (Russell & Taylor, 2009, p. 411). In order to meet customer and self needs, companies maintain inventory. Inventory exists to meet customer demand. Carrying costs are the costs of holding items in inventory. Ordering costs are costs associated with replenishing the stock of inventory being held. Shortage costs occur when customer demand cannot be met because of insufficient inventory.

The purpose of inventory management is to oversee and determine the amount of inventory to keep in stock, how much to order and when to replenish an order. An inventory control system controls the level of inventory. There are two basic types of inventory control systems; continuous and periodic. A continuous inventory system maintains a continual record of inventory levels. When inventory levels drop to a predetermined level, an order is placed. A periodic inventory system counts inventory on hand and an order is placed to restock inventory at a predetermined time, such as weekly or at the end of each month. "Inventory management

involves planning ,coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs"(Collier & Evans, 2007, p.482).

The ABC system is a method for classifying inventory according to several criteria, including its dollar value to the firm. "Activity - based costing (ABC) analyzes

indirect costs and assigns them in sophisticated and precise methods across various services or products" (Ronen & Pass, 2009, p.241). Class A Items are 5 to 15% of all inventory items and 70 to 80% of total dollar value of the inventory. Class B Items are 30% of total inventory and 15% of total inventory dollar value. Class C Items are 50 to 60% of all inventory units and 5 to 10% of total dollar value.

Classify Inventory Items as A, B, or C by assigning a dollar value, the rank them according to annual dollar value. To determine level of inventory control, class An items require tight inventory control, class B items require inventory control that is not as strict, and class C items only require observation. Some predominant reasons for classification are cost, scarcity of parts, or difficulty of supply.

"Forecasting is important to organizations in planning human resources, raw materials inventory, developing marketing and sales channels, and cash flow"(Ronen & Pass, 2008p.150). Forecasting aids a company in for seeing unexpected losses or gains with their inventory. It can also help a company