Inventory as an asset

The company I used to work with usually holds a special inventory, a considerable amount of our own products for our R&D use for the development of next generation systems.  It is an inventory and an investment as well. Wall Street doesn't like that and usually considers it as a negative effect on the stock price. But we have to maintain those systems for new products.

I have no idea how they achieve an optimal quantity of that inventory. I doubt they ever use

any inventory control on it.

-Bing Liu

BBJ Article - Honda Accord

http://www.bizjournals.com/birmingham/stories/2008/10/13/daily1.html?surround=lfn&brthrs=1

This article describes the recent decision by Honda to start producing their Honda Accord in their Alabama manufacturing plant. According to the article, this decision has adjusted the overall production mix for the Alabama plant, which means their other "Alabama" vehicles will now be produced in smaller quantities (the Honda Pilot and the Honda Odyssey).

I thought this article was interesting because it can relate to some of the materials in our OM 523 class, specifically the Economic Production Quantities. Production managers at Honda must be keenly tuned into their demand patterns for ordering decisions, because their production rates are now changing. Therefore, in order for the company to avoid stock-out costs as well as avoid producing too many of these vehicles, their inventory managers must alter the EPQ calculations.

-Andrew Freeman

WSJ Article - "Firms Struggle with Commodities Costs"

Amidst the growing economic concerns that our country is facing, many businesses, both large and small, are experiencing significant changes to their cost structure(s). This article does a good job of highlighting the broad-spanning increase in commodities costs, which are causing havoc for many organizations.

We can relate this article to our EOQ discussions from class (Pause briefly for an outburst of pure excitement!!!)

The fundamental objective for our EOQ models is to minimize total costs, which is primarily a function of ordering and holding costs. As a result of violent fluctuations in the costs of various commodities, there has been an abrupt shift in firms' ordering and holding costs, which effectively changes an organization's EOQ calculations. For example, the increasing price of gasoline has made transportation more expensive; thus, these increasing transportation costs have changed relevant ordering costs for many products.

-Andrew Freeman

Inventory Management Thoughts from Andrew Freeman

I have recently been working on a Kaizen Event at my work, which is the Student Health Center. As we began the first phase of the 5-S process, which is sorting, we quickly realized that we were carrying way too much inventory. For example, we were stocked with dozens of crutches and they were taking up a significant amount of space in a treatment room. Therefore, I have concluded that we are incurring some sort of opportunity cost as part of our inventory holding cost(s).

As this project and other initiatives continue, I will hopefully be applying my classroom knowledge from OM 523 to help us better manager our inventory.

-Andrew Freeman

What's new with algebraic analysis on EOQ/EPQ?

In the paper "EOQ and EPQ with linear and fixed backorder costs: Two cases identified and models analyzed without calculus" by Sphicas, the author extends algebraic analysis to EOQ and EPQ with both linear and fixed backorder costs without using any skill of calculus. Moreover, this paper provides further insights into the EOQ and EPQ models with additional obervations.

The author states the conditions to determine whether backorders are too expensive or backorders should be carried by comparing the per unit operational cost without backorders and the total fixed cost of backordering everything. The size of the linear backorder cost doesn't affect the optimal choice.

A correction to previous works is that even if the value of 2KD(h+p) - (pai)^2 D^2 is positive, it may not achieve the optimal Q. The exact range for (pai)D was reported.

The eventual optimal total cost is the same as it would be if the maximum inventory was continuously carried and nothing else happened.

Another special case is identified that if only one backorder cost is assumed, both Q and S are infinite when considerring backorders. The author provides an eaiser proof of this known result than using calculus.

The algebraic analysis of EPQ model is basically similar.

- Bing Liu