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Inventory And Ordering Decisions

Analyze an operations management issue in a hypothetical company and provide answers to five algebraic equations.

Operations management is the core of any business. Understanding the basics of operations management and the associated best practices allows you to understand the importance of eliminating waste, while improving quality and customer service. Inventory is no longer simply a necessary evil, but a means by which companies have found ways to gain competitive advantage.


By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Assess the role of operations management within organizations.
    • Analyze a production decision using an aggregate production rate approach.
    • Analyze a labor related production decision.
  • Competency 2: Apply the tools and technology used in Operations Management.
    • Analyze an inventory decision using an economic order quantity approach.
    • Analyze an inventory decision using a reorder point approach.
    • Describe key forecasting methods.



For this assessment, suppose that you are the operations manager for ABC Manufacturing, a small manufacturing company founded three years ago. ABC has been manufacturing and selling an electric motor for the past year, but the company has not always had sufficient workers assigned to manufacturing this electric motor in order to satisfy demand. ABC’s president asked you to plan for the production of this motor for the next six months.

You have decided you will use a level aggregate plan for the electric motor, meaning that you will manufacture the same number of units each month. ABC’s president has told you that some customers order this motor well in advance of when needed, and thus it is allowable to have backorders, if needed. You know there are currently 150 units in inventory (starting inventory = SI), and ABC’s marketing manager estimates that the demand for the motor (in units) for each of the next six months (M = 6) will be 240, 225, 265, 270, 260, and 275 (D1, D2, D3, D4, and D5 respectively). You have decided you would like to reduce average inventory level of several products (including this one), and you want to have 50 units in inventory six months from now (ending inventory = EI).


Briefly describe the operations management issue in the ABC Manufacturing scenario and describe how you would approach an analysis. Then complete the following problems based on the scenario and provide answers to the algebraic equations.

Question 1. Refer to the ABC Manufacturing scenario to complete the following:

  • Provide the algebraic equation for the monthly aggregate production rate (APR, using SI, EI, D1, D2, D3, D4, D5, and M as variables).
  • Calculate and provide the numerical monthly aggregate production rate rounded to a whole number.

Question 2. Production employees at ABC work an average of 168 hours per month (HPM), and manufacturing the electric motor involves 3.5 total hours of work per unit (HPU).

  • Provide the algebraic equation for the number of workers (W) needed to meet the above aggregate production rate (using W, APR, HPM, and HPU as variables).
  • Calculate and provide the numerical number of workers needed.

Question 3. One subcomponent in this electric motor is also used in two other products manufactured by ABC. ABC’s president has told you that the company expects to use 5,400 (annual quantity = AQ) of these subcomponents during the next 12 months, with a consistent demand for them month-to-month (and a consistent demand during each month, with the business day daily demand, DQ, being 22). He has further told you that it costs $10 to place an order (order cost = OC) for this subcomponent (regardless of the quantity ordered), that the annual holding cost is $2 per unit (unit holding cost = UHC). Finally, he has stated that out of 21 business days per month, there is a five business day lead time (LT = 5) associated with ordering this subcomponent.

  • Provide the algebraic equation for the economic order quantity (EOQ, using AQ, OC, and UHC as variables).
  • Calculate and provide the numerical economic order quantity rounded to the closest whole number.

Question 4. Refer to the ABC Manufacturing scenario to complete the following:

  • Provide the algebraic equation for the reorder point (RP, using DQ and LT as variables).
  • Calculate and provide the numerical EOQ, rounded to the closest whole number.

Question 5. Historically, ABC has based its production on estimates from the company’s marketing manager. While that has generally been successful, you have decided you would like to factor in an operations management approach to estimating demand.

  • Describe the following forecasting methods. Provide the math associated with each method and identify the pros and cons of using it:
    • Naïve.
    • Simple mean.
    • Simple moving average.
    • Weighted moving average.
    • Exponential smoothing.
    • Linear trend line.




Meeting the customers’ needs is still paramount, but the massive warehouses and their associated costs are no longer needed. Explore the concept of inventory and some of the best practices companies use to keep overhead costs low, build flexibility within the system, and provide strong customer service. Understanding the costs of inventory allows companies to classify inventory and determine the right amount of cycle counting. Operational thinking along these lines helps reduce waste, such as high fuel costs and packaging that also have significant impact on the environment.


Aggregate Planning

Aggregate planning begins with the understanding of strategic planning and the integration of marketing plans, sales plans, manufacturing plans, and purchasing plans to meet the needs of the customer over the short and long term. Anticipating the demand, along with the specific lead time to produce a product, is combined in the master production schedule (MPS). This tool incorporates the strategy into a document by which to guide the company in its production of the product or service. MPS is a communication tool for the whole company to utilize.


Sales Forecasting

Sales forecasting is an integral piece in the success of a business. In this unit, you will review concepts utilized by most companies to do an accurate and reliable forecast. The basic types of forecasting are qualitative and quantitative. Most companies will use some form of both of these types. The main emphasis of forecasting is to deliver a document that allows a company to communicate where it is in relation to its plan. The forecast helps determine the work load and the scheduling of the resources. It is important to realize that forecasts are best guesses the company makes in regards to future sales. Forecasts are seldom 100 percent accurate, so it is important to constantly monitor the forecast in comparison to actual sales. Forecasts should be adjusted for unforeseen interruptions, when they occur. Forecasting changes in technology, process, legislation action, and other variables are critical to an organization’s achieving sustainability.



Scheduling is tied closely to the forecast. The two types of scheduling are finite and infinite loading. Each of these has rules that help prioritize how the workflow will be accomplished. Scheduling includes the requirements needed from both raw materials and manpower to accomplish the set sales goals. Companies often experience bottlenecks that limit their ability to deliver the products or service. The theory of constraints identifies those bottlenecks and strives to reduce them, thus improving efficiency and reducing costs of producing the product or service. Sustainability is another pressing issue for organizations; scheduling decisions can affect impacts to the organization’s cost to the environment. An example of such a cost might be carbon emissions.


Additional Requirements

  • Written communication: Written communication should be free of errors that detract from the overall message.
  • APA formatting: Any references and citations should be formatted according to APA (6th edition) style and formatting.
  • Font and font size: Times New Roman, 12-point.
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