OPM 530 INDIVIDUAL ASSIGNMENT: ARTICLE SUMMARY

NAME: MUHAMMAD LUTFIL HADI BIN ESA

UITM STUDENT ID: 2020995255

PROGRAME CODE: BA242

GROUP: JBC2422A

SUBMITTED TO: PUAN CHE FARIDAH BINTI CHE MAHMOOD

SUBMISSION DATE: 21 MAY 2020

TABLE OF CONTENT

NO. CONTENT PAGE

1 Article Summary 1 2-3
 Economic Order Quantity (EOQ) -
 The Original Article 4-5
2 Article Summary 2 6-7
 Importance of Inventory Management -
 The Original Article 8-13
3 Article Summary 3 14
 Type of Inventories -
 The Original Article 15-16
4 References 17

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 ARTICLE SUMMARY 1: ECONOMIC ORDER QUANTITY (EOQ)

Economic Order Quantity by Will Kenton was written on Feb 10, 2020 explain
that EOQ is a company's optimal order quantity that minimizes its total costs related
to ordering, receiving, and holding inventory.

Economic Order Quantity (EOQ) is a model that was developed in 1913 by

Ford W. Harris. This model contains formula which assumes that demand, ordering,
and holding costs all remain constant. A lot of company in this world use this model
since the formula can be using to minimize inventory of a company by giving the
ideal order quantity that a company should purchase. The EOQ formula is best
applied in situations where demand, ordering, and holding costs remain constant
over time.

EOQ formula usually use by a small company to identify optimal number of

products units that should be order, EOQ formula also can be modified to determine
different production level or order interval but to determine EOQ for company that
cooperation with high variable cost and large supply chain, they usually use an
algorithm in their computer software.

The reason why company usually use EOQ is it can help the company to
minimize the level of inventory so the cash that the company get can be using for
investment or some other business purpose. EOQ indirectly be one of the important
cash flow tools since inventory is one of the largest assets other than human
resources for most of the company, so EOQ can help to control the amount of cash
tied up in the inventory balance.

The EOQ formula help company to determine the reorder point which means
the company can avoid running out of inventory and can continue their business as
usual without facing lost in revenue. EOQ is apply when inventory falls to a certain
level so the EOQ will triggers the need to place an order for more units. Company
will lose their customer or the client will order less quantity of unit in future if a
company has insufficient inventory and indirectly a company will face lost in revenue
since there is a shortage cost in inventory.

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 The need for additional storage space and increasing in the ordering cost may
occur if a company constantly placing small order to maintain specific inventory level.
EOQ takes into account the timing of reordering, the cost incurred to place an order,
and the cost to store merchandise.

Lastly, there also has the limitation of using EOQ formula since the formula is
impossible to account for business event such as purchase discount for a company
that buy in a large quantity, inventory shortage that will cause of lost in revenue,
seasonal change that will change the inventory cost, or changing in consumer
demand. It might be impossible for the formula because the EOQ formula assume
that consumer demand, ordering and holding cost remains constant.

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Economic Order Quantity – EOQ Definition

By WILL KENTON

Updated Feb 10, 2020

What Is Economic Order Quantity (EOQ)?

Economic order quantity (EOQ) is the ideal order quantity a company should
purchase to minimize inventory costs such as holding costs, shortage costs, and
order costs. This production-scheduling model was developed in 1913 by Ford W.
Harris and has been refined over time. The formula assumes that demand, ordering,
and holding costs all remain constant.

What the Economic Order Quantity Can Tell You?

The goal of the EOQ formula is to identify the optimal number of product units to
order. If achieved, a company can minimize its costs for buying, delivery, and storing
units. The EOQ formula can be modified to determine different production levels or
order intervals, and corporations with large supply chains and high variable costs
use an algorithm in their computer software to determine EOQ.

EOQ is an important cash flow tool. The formula can help a company control the
amount of cash tied up in the inventory balance. For many companies, inventory is
its largest asset other than its human resources, and these businesses must carry
sufficient inventory to meet the needs of customers. If EOQ can help minimize the
level of inventory, the cash savings can be used for some other business purpose or
investment.

The EOQ formula determines a company's inventory reorder point. When inventory
falls to a certain level, the EOQ formula, if applied to business processes, triggers
the need to place an order for more units. By determining a reorder point, the
business avoids running out of inventory and can continue to fill customer orders. If
the company runs out of inventory, there is a shortage cost, which is the revenue lost
because the company has insufficient inventory to fill an order. An inventory
shortage may also mean the company loses the customer or the client will order less
in the future.

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Example of How to Use EOQ
EOQ takes into account the timing of reordering, the cost incurred to place an order,
and the cost to store merchandise. If a company is constantly placing small orders to
maintain a specific inventory level, the ordering costs are higher, and there is a need
for additional storage space.

Assume, for example, a retail clothing shop carries a line of men’s jeans, and the
shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold a
pair of jeans in inventory, and the fixed cost to place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding
cost) or 28.3 with rounding. The ideal order size to minimize costs and meet
customer demand is slightly more than 28 pairs of jeans. A more complex portion of
the EOQ formula provides the reorder point.

Limitations of Using EOQ

The EOQ formula assumes that consumer demand is constant. The calculation also
assumes that both ordering and holding costs remain constant. This fact makes it
difficult or impossible for the formula to account for business events such as
changing consumer demand, seasonal changes in inventory costs, lost sales
revenue due to inventory shortages, or purchase discounts a company might realize
for buying inventory in larger quantities.

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 ARTICLE SUMMARY 2: IMPORTANCE OF INVENTORY
MANAGEMENT

Inventory Management by DR. Muddasir Ahmed website explain that

inventory management enhances business operations with the effective flow of
goods and services. To enhance and making successful management, inventory
management and control can provide action and strategies in to all management
controlling, planning, and process. Inventory management can increase product
quality, competitive ability, and reducing inventory carrying cost. Company usually
use inventory management and controlling to control the movement of products and
services following their demand.

Inventory management and control have a massive effect on business finance

since it controlling both purchasing and selling stock. By managing and controlling
inventory it can lead to economic and business efficiency. The importance of
Inventory management and controlling is it can increase the market share, by
increasing in market share it can make way easier for competitive ability.

Next, the importance of inventory management and control is it can improve

service level and reduce storages cost. This is because by control and manage
inventory it can help the company to provide demand with the right levels of hands-
on service immediately to the customer. Indirectly the clients will happy to come back
to purchase the product and services in the company. Having the right amount of
stock can reduce storage cost and increase revenue for the company.

The important of inventory management and control is it can increase the

revenue. this is because by applying inventory planning a company is capable of
increasing its profitability. A company can’t maximise their operational efficiency if
they overlook the advantage of the inventory management in its trade, sales, and
production. By using lessened cost of production, a company can increase their
gross profit since inventory’s cost of purchase and production can affect on gross
profit.

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 The company can utilize warehouse space better is also one of the important
of inventory management and control. A company will face difficulty to handle their
inventory if the company can’t manage their inventory properly. Inventory
management and control can speed up the order fulfilment and maintain their
customer’s happiness by arrange the best seller product in area that are easily to
access in the warehouse.

Inventory can relate to accounting where inventory management and

controlling can make accounting activities or department easier. Some company can
manage their company’s cash flow well by implement plan such as account for
inventory value, keep inventory flow, and control outdated product in their inventory
planning. Set aside some investment into the most effective and practical inventory
system also can inflate the business cash flow. In order to accomplish better
business and organisational goal, a company need to have a better cash flow.

Last but not least, effective inventory management and control can bring
potential saving to the company. Company can have monetary and real-time benefit
by having an effective inventory management. Company that focus on product that
bring in more sales can save more money rather than focusing on slow-moving
products that can make company lost. Reduction in inventory carrying cost can
positively impact the bottom line this is because the reduction money can be uses to
gain interest income that are one of the bottom-line benefits.

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Importance of Inventory Management – 14 Awesome Benefits You should
know.

By Dr. Mudassir Ahmed

Updated on May 16, 2019

Do you know the importance of inventory management? I’m sure most of you will say
yes! But do you know the full range of benefits of inventory management?

Inventory management enhances business operations with the effective flow of

goods and services. Inventory Management and control implies the controlling of
business stock or controlling the movement of products and services following their
demand. Inventory Management and control are highly beneficial in today’s business
world as it makes a vital part in any business success/failure having intense
competition within its industry. The benefits of inventory management and the
knowledge about its usage are vital for enhancing product quality, improving
competitive ability, reducing inventory carrying costs by reducing inventories, service
enhancement, and operational flexibility through pull systems. Inventory
Management and control provide actions & strategies that are integrated into all
management controlling, planning, and processes which are crucial to enhancing
and making successful management.

Every business inventory requires a lot of focus, and such attention is provided
through Inventory Management and control. The list usually involves the most
considerable cash-flow in any business, both concerning purchasing and selling
stock. That’s why Inventory Management and control would, in turn, have a massive
effect on business finance. Aside from adding competitive ability and profitability, the
benefits of inventory management are, and it fosters growth leading to economic and
business efficiency.

1. Inventory Control Paves for Competitive Ability

The usage of Inventory Management and control benefits inventory control by

enhancing market shares thus, paving the way for competitive ability. The best
example is Apple’s smart inventory management which gives them a competitive

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advantage. Commonalities with values, high factor loadings values, and significant
mean values are factors taken into consideration in determining a business supports
for competitive strength. These factors undoubtedly demonstrate the importance
Inventory Management and control, enhances market share and improves
competitive ability.

2. Inventory Planning Improves Service Level

It remains the fact that good Inventory Management and power leads to what all
business strive for continuity, the repeat clients. If you desire your hard-earned
clients to come back to purchase your products and services, it is necessary always
to improve your service level enough to be able to match customer request swiftly.
Inventory Management and control aid businesses in meeting such demand by
permitting you to provide the right levels of hands-on service immediately your
customers require them with the desired lead time, highlighting the importance of
inventory management,

3. Inventory Planning and Management Reduces Storage Cost

These benefits of inventory management envisage on focusing upon Inventory

planning and reducing storage costs as you maintain adequate inventories. The
central values feature significant factor loadings and commonalities exhibited
through proper Inventory Management and control. The factor lowers storage costs
and increases revenue by using adequate inventory management and control
emphasising importance of inventory management.

4. High Inventory Turnover Brings Revenues

Applying Inventory planning to any business can serve as a bridge to bring in higher
revenues. Through proper Inventory Management and control, a company is capable
of increasing its profitability. If a business overlooks the benefits of inventory
management in its trade, sales, and production, it is possible to hamper
maximisation of its operational efficiency. Intrinsically, the inventory’s cost of
purchase and production has a substantial effect on gross profit. Using lessened
cost of production, a business raises its gross profit. That is why proper inventory
planning is required. And with all accounts placed as equal, such company would

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record superior revenues, which in effect, leads to more profits, again substantiating
importance of inventory management.

5. You Can Utilize Warehouse Space Better

Proper Inventory Management and control involve accounting for all production,
purchase, and sale of goods that meets customers’ demand. These benefits of
inventory management affect management strategy that supports organisational
warehouse in attaining better space management.

If you have an unorganised warehouse, you would always find it difficult to handle
your inventory effectively. Several businesses elect to enhance their warehouses by
arranging higher selling products together in areas that are easily accessible within
the warehouse. Performing this process aids in speeding up the order fulfillment and
preserves customer’s happiness.

6. Inventory Control Makes Cost Accounting Activities Easier.

Better inventory management is surely going to make your financial controller

happier and you can be easily in his good books!

Business owners often develop internal strategies and measures that will guarantee
better control and planning of production and sales. Such approaches involve
binding every partaker in the business to delivering activities that make Accounting
Activities Easier including managers. Usually, these strategies aid such industry to
order, account for inventory values, keep inventory flow, along with assistance on
how to control obsolete goods. By executing such plans in inventory planning,
several businesses can be able to manage its cash flow well.

To enhance your business cash flow, it is expected you set aside some investment
into the most effective and practical inventory system that is powerful enough to
meet your requirement and is also suitable to match your business environ. For this
reason, companies with well thought out plans can save a lot more from the use of
active Cost Accounting Activities. Additionally, better Inventory Management and
control aid your business in establishing cost benefit for you concerning the financial
market conditions. Better cash flow lets companies attain better business and
organisational goals.

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7. Inventory Control Is Consistent with Safety and Environmental Advantage.

Too much inventory in warehouse can be health and safety issue when employs
struggle to walk on the shop floor, cannot moves goods easily and it is falling from
the shelves.

Good inventory management leads to inventory reduction which leads to less

packaging which leads to less waste and contribute to environmental advantage. For
me one of the best reasons to show importance of inventory management!

8. Regular Supply at Reasonable Prices Builds Customer Confidence

Evidently, with better strategies in place, any given organization can use inventory
planning and control to improve its cash flow by providing higher customer service at
consistent pricing. Inventory control and planning solution allows small business to
gain insight into what products are selling more than others. This step will enable
them to adjust their product line and to make intelligent business decisions.

9 Inventory Holding Results in Effective Utilization of Human and Equipment

Proper Inventory Management and control solutions save time regarding human
resources and equipment usage. Less time expended on managing inventory leads
to higher productivity for your business and clients as well. With these benefits of
inventory management, your business stays steps ahead of the game and
continuously have enough number of products at hand based on inventory
movements.

I have seen this first hand during my days as Supply Chain Manager, if excess
inventory is not your problem and you are hitting your targets, then you can find time
to drive Kaizen activities to drive further improvement in supply chain department.

10 Effective Inventory Control Enhances Market Share

For companies whose scale of operations does not permit the running of several
inventories by product line or SKU, the usage of Proper Inventory Management and
control solves it. Nevertheless, in some situations, your business size does not
matter since roles and policies have to be set up irrespective of the size of the
business. Such procedures and set up will help govern inventory spending and
Enhance Market Share.

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As we already established Inventory Management and control allows business to be
able to handle all cash flow prospects. Companies are not continuously able to
procure large amounts of inventory, as capital remains a significant factor in doing
so. By having proper Inventory Management and control, businesses can recognise
precisely what inventory size is needed and when to deploy them. This step can
Enhances Market Share and free up other capitals for re-investment.

11 Inventory Control Enhances Product Quality

The use of Inventory Management and control can assist in remarkably improving
business efficiency and product quality. These benefits of inventory management
would aid in eliminating waste, and enhances focus on producing Right First Time or
Six Sigma Quality.

It remains a fact that having a good inventory management system leads to better
success and repetitive customers. If you desire your hard-earned customers always
to keep coming, you have to enhance your product quality in the best ways possible.

12 Effective Inventory Control Brings Potential Saving

Proper Inventory Management and control can Bring in Potential Saving as benefits
of inventory management. These benefits of inventory management provide
businesses with monetary and real-time benefits. There is a debate within controllers
if inventory reduction which leads to reduction of inventory carrying cost, can
positively impact the bottom line? For me the answer is Yes!

The simple logic is if you reduce $100k of onhand inventory, and put this money in
bank to gain interest, which is equivalent to bottom-line benefit.

By monitoring which product bring in more sales and what other potentials they
have, your business can save more on every effort with an inventory recount to
safeguard accurate records. Good Inventory Management and control strategy also
benefits businesses in saving money that could otherwise be lost in slow-moving
products. No one can deny this as top reason to show the importance of inventory
management!

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13 Inventory Control Avoids Costly Interruptions in Operation

Inventory Management and control are beneficial in limiting the employee’s ability to
steal or disrupt your operations. Often costly interruptions in service in businesses
can be averted with proper planning. Deprived of inventory control, companies may
be none-the-wiser to such disruption. These benefits of inventory management
ultimately improve business profitability. By avoiding costly interruptions, businesses
can reduce any ‘hidden’ costs. Showing, importance of inventory management.

14 Inventory Control Strategy Facilitates Purchase Economies

Good Inventory Management and control aids in Facilitating Purchase Economies

and maintaining steadiness in production operations. This approach is down to the
maintenance of smooth flows in accessing raw materials. Consequently, there are no
shortages experienced during the production process — these benefits of inventory
management aids in reducing the risk of loss due to desuetude or deterioration of
items, hence, highlighting the importance of inventory management. Such checks
are placed on items regularly. Additionally, selling all slow-moving items promptly
and maintains the right stock all Facilitates Purchase Economies.

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 ARTICLE SUMMARY 3: TYPE OF INVENTORIES.

Type of inventory by Prachi Juneja and review by Management Study Guide

(MSG) explain that the need of inventory is created based on the demand pattern
that can be categorised in two type which is independent demand and dependant
demand for inventories.

Independent demand in an inventory of an item that are not dependent upon

the demand for another item. Independent demand item is a finish goods that are
order by external customer or manufacture for stock and sales. Estimate, past
historical data, forecast, and confirmed customer order is one of the independent
demands for inventories. Finished goods inventories are manage with sales order
process and supply chain management processes and are based on sales forecasts.

Dependant demand is an inventory item that is dependent upon other item

such as raw materials and component inventories are dependants upon the demand
for Finished Goods can be classify as dependant demand. Model such as Just In
Time, Kanban, and other concept is use by MRP – Material Resource Planning or
ERP – Enterprise Resource Planning in the dependant demand to manufacture the
finish goods. The starting point for further action in MRP or ERP planning is
depending on the sales forecast released for finished goods.

Managing finished goods inventory is a lot easier than managing raw material
inventories this is because before raw materials are ready to be supplied to the
production shop floor there are bunch of process that involve in the raw material to
be ready such as inspect and co-coordinating delivery capacity, logistical processes
and transit timelines involved in transportation and warehousing, and detailed
analysis of the reports leading to financial and management decisions.

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Types of Inventories - Independent and Dependant Demand Inventories

By Prachi Juneja

Updated on 2015

Inventory Management deals essentially with balancing the inventory levels.

Inventory is categorized into two types based on the demand pattern, which creates
the need for inventory. The two types of demand are Independent Demand and
Dependant Demand for inventories.

 Independent Demand

An inventory of an item is said to be falling into the category of independent demand

when the demand for such an item is not dependants upon the demand for another
item.

Finished goods Items, which are ordered by External Customers or manufactured for
stock and sale, are called independent demand items.

Independent demands for inventories are based on confirmed Customer orders,

forecasts, estimates and past historical data.

 Dependant Demand

If the demand for inventory of an item is dependants upon another item, such
demands are categorized as dependant demand.

Raw materials and component inventories are dependants upon the demand for
Finished Goods and hence can be called as Dependant demand inventories.

Take the example of a Car. The car as finished goods is held produced and held in
inventory as independent demand item, while the raw materials and components
used in the manufacture of the Finished Goods - Car derives its demand from the
demand for the Car and hence is characterized as dependant demand inventory.

This differentiation is necessary because the inventory management systems and

process are different for both categories.

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While Finished Goods inventories which is characterized by Independent demand,
are managed with sales order process and supply chain management processes
and are based on sales forecasts, the dependant demand for raw materials and
components to manufacture the finished goods is managed through MRP -Material
Resources Planning or ERP - Enterprise Resource Planning using models such as
Just In Time, Kanban and other concepts. MRP as well as ERP planning depends
upon the sales forecast released for finished goods as the starting point for further
action.

Managing Raw Material Inventories is far more complicated than managing Finished
Goods Inventory. This involves analyzing and co-coordinating delivery capacity, lead
times and delivery schedules of all raw material suppliers, coupled with the logistical
processes and transit timelines involved in transportation and warehousing of raw
materials before they are ready to be supplied to the production shop floor. Raw
material management also involves periodic review of the inventory holding,
inventory counting and audits, followed by detailed analysis of the reports leading to
financial and management decisions.

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REFERENCES
Dr. Muddasir Ahmed. (2019, May 16). Importance of inventory management - 14
awesome benefits you should know. SCMDojo.
https://www.scmdojo.com/importance-of-inventory-management/
Prachi Juneja. (2015, March 17). Types of inventories - Independent and dependant
demand inventories. Management Study Guide - Courses for Students,
Professionals & Faculty Members.
https://www.managementstudyguide.com/types-of-inventories.htm
WILL KENTON. (2020, February 20). Understanding economic order quantity –
EOQ. Investopedia.
https://www.investopedia.com/terms/e/economicorderquantity.asp

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