Inventory Management LF Chemical Company

Question: Discuss about theInventory Managementfor LF Chemical Company. Answer: Introduction LF Chemical Company profiles his customers in four categories based on the customers sales volume and due to this, the company will experience different annual variable costs depending on the annual demand per the category of the customers. Listing the variables as given in consistent units: Annual Variable Cost per the Low customer category Demand (D) = 1,500 12 months = 18,000 units Unit Cost (UC) = $1 Reorder Cost (RC) = $ 500 Holding Cost (HC) = 30% of the product cost per annum. Holding Cost (HC) = 0.3 $1 = $ 0.3 Optimal order quantity: The optimal variable cost per unit time; VC0 = HC Q0 = 0.3 7,746 = $ 2,323.8 The optimal total cost per unit time; TC0 = UC D + VC0 = 1 18,000 + 2,323.8 = $ 20,323.8 Variable cost per unit time (VC); Annual Variable Cost per the Medium customer category; Demand (D) = $5,500 12 months = 66,000 units Optimal order quantity for this category of customers will be: Q0 = 14,832.4 and since the petrochemical products are in discrete units, the value becomes 14,832 units The corresponding annual Variable cost per unit time (VC) becomes; Annual Variable Cost per the High customer category; Demand (D) = $8,000 12 months = 96,000 units Optimal order quantity for this category of customers will be: Q0 = 17,888.5 The petrochemical products usually come in discrete units and therefore, the optimal quantity becomes 17,889 units. The categorys corresponding annual Variable cost per unit time (VC) becomes; Annual Variable Cost per the Ultra High customer category; Demand (D) = $11,000 12 months = 132,000 units Optimal order quantity for this category of customers will be: Q0 = 20,976.2 and this is also rounded off since the products are shipped in discrete units making the optimal quantity to be 20,976 units. This categorys corresponding annual Variable cost per unit time (VC) becomes; By adopting the use of independent demands for each category of the customers, the company will incur higher operational costs for the delivery of the petrochemical products since each consumer demand attracts a higher variable cost which eventually results in higher total costs. Moreover, as a result of the lack of in-house logistics expertise, the account managers adopt the use of a heuristic approach. This method results in excess supply of the petrochemical products as the total demand is less than the full capacity of the delivery track. The total capacity of the manufacturers delivery truck is 35,000 pounds while the sum of the demand volume for the 30 customers is 26,000 pounds (1,500+5,500+8,000+11,000) (Weng Cheon, 2013). This less demand, therefore, leads to an excess of 9,000 pounds increasing the company expenses. Since the current strategy adopted by LF Chemical Company does not result in the minimization of cost in the inventory management, it is regarded as imperfect and therefore the managers should consider adopting a new strategy that enhances efficient inventory management (Subramanian, Rawlings Maravelias, 2014). From this scenario, the best strategy to use will be the Economic Order Quantity (EOQ) model. The EOQ provides a guideline that improves the inventory management for the company since it controls the rise of the variable costs. For this model to be appropriate in inventory management, it adopts the following assumptions as noted by Weng and Cheon (2013); There is a relatively constant annual demand rate and it is known with certainty. The ordering costs do not fluctuate The lead time remains at zero There is an order point system which indicates that inventories are received continuously The replenishment is done when the stock level is at zero The inventory is replenished instantaneously that is; the entire order is received as a single batch The order quantity is constant for each replenishment order There are no stock-outs By adopting the EOQ, LF Chemical uses the following formula to minimize its annual variable costs; Using this model, the sum of the demand becomes 26,000 pounds, Reorder cost remains at $ 500 and the Holding cost remains as $0.3 Q0 = 9,309 units The annual variable cost (VC) per unit time therefore becomes; As noted from the above calculations, it is evident that the EOQ model is the best strategy to minimize the costs. References Subramanian, K., Rawlings, J. B., Maravelias, C. T. (2014). Economic model predictive control for inventory management in supply chains. Computers Chemical Engineering, 64, 71-80. Weng, T.Y., Cheon, K.F. (2013). LOG203: Inventory Management Study Guide (5CU), Singapore, Educational Technology Production Team