B&S Novelty is a craft shop which applies a fixed order quantity system and sells handmade crafts to tourists. In this particular inventory system, if the demand of a product remains constant, then the reorder point will remain the same as the previous month. However, if the demand is uncertain, then the reorder point is normally taken above the expected demand for the product. Whenever the level of stock is close to the reorder point, an order is to be placed by the company. The company’s inventory is dependent on the demand of tourists and the interests of local people for its product (Khanna, 2007).
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The company faces an issue of safety stock because the production is fixed, and the company does not carry inventory. Also, it reduces the chances of carrying cost for the company because of no inventory. But on the other hand, it creates chances of being out of stock; therefore, the company’s demand forecast has to be accurate in order to prevent a situation of running out of stock out (Waters, 2007).
The sequence for ordering is random; therefore, the company has to continuously forecast the demand for its product which may lead to issues related to order quantity. The costs of direct material and direct labour also continue to mount even if the product is not produced, which could be considered as a major disadvantage for the company. The demand is very uncertain, but the probability of the demand distribution can be estimated by various techniques (Heizer, Render, & Rajashekhar, 2009).
The system is inappropriate for the firm and thus, needs improvement. The firm can apply a fixed time-period inventory in which reorder is placed at pre-determined intervals. This particular system is appropriate in a situation where customers make routine visits. It can complement the firm’s business in a way that the majority of target markets for the company are tourists (Swamidass, 2000). Therefore, when the tourist season is at its peak, then the company can increase its production of handmade crafts for a particular interval. Otherwise, the company can continue with its normal demand at other times in a year. In my opinion, B&S Novelty should adopt a strategy of fixed time interval quantity to manage their inventory effectively.
Heizer, J., Render, B., & Rajashekhar, J. (2009). Operations Management. New Delhi: Pearson Education India.
Khanna, R. (2007). Production And Operations Management. New Delhi: PHI Learning Pvt. Ltd.
Swamidass, P. (2000). Encyclopedia of Production and Manufacturing Management. Massachusetts: Springer.
Waters, D. (2007). Inventory Control and Management. New York: John Wiley & Sons.