How to Properly Manage Inventory?

Running Head: INVENTORY MANAGEMENT 1
INVENTORY MANAGEMENT 2

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Successful inventory management is very important to accompany as it reduces additional costs to the company such as storage costs, insurance among others in the case of overstock. On the other hand, loss of customers’ loyalty and trust may occur if the company cannot produce to meet their demand; this is in the case of low stock levels. To ensure that optimal stock levels are maintained, companies adopt Economic Order Quantity (EOQ), which ensures ordering for the right quantities at the lowest costs.
This model has the following advantages: the demand is uniform or constant and is even through-out the period, the demand or usage is known within a given period of time, it has constant carrying costs whereby the cost of carrying is taken as a fixed percentage of the average value of the inventory, it has a constant ordering cost which is independent of the size of the order and finally it has a constant unit price for materials which does not change regardless of the order size.
On the other hand, EOQ has disadvantages, which are discussed below: It does not account for seasonal fluctuations but only assumes steady demand of a business product, which cannot happen throughout in real life situations. It requires continuous monitoring of the inventory levels, which is costly. Its effectiveness is limited by the assumption of a one-product business, as the formula does not give room for combination of various products in the same order. Finally, it assumes fixed ordering and holding charges and fixed costs of inventory units of which they are all prone and subject to change.
If I were given the mandate to be in charge of inventory for a small manufacturing firm, I would recommend that we use EOQ model to minimize both storage and holding costs.