Recently, I was checking the news in the web page of the magazine Entrepreneur and I saw this title "Inventory Control. When it comes to inventory, the key is striking a balance between too little and too much." It was interesting to read something about we have been discussing in class.
"One way to protect yourself from such shortfalls is by building a safety margin into basic inventory figures. To figure out the right safety margin for your business, try to think of all the outside factors that could contribute to delays, such as suppliers who tend to be late or goods being shipped in from overseas. Once you have been in business a while, you'll have a better "feel" for delivery times and will find it fairly easy to calculate your safety margin".
"No matter what your business, however, excess inventory is something to be avoided. It costs you money in extra overhead, debt service on loans to purchase the excess inventory, additional personal property tax on unsold inventory and increased insurance costs. In fact, one merchandise consultant estimates that it costs the average retailer anywhere from 20 percent to 30 percent of the original inventory investment just to maintain it. Buying excess inventory also reduces your liquidity-something to be avoided."
When you find yourself with excess inventory, your natural reaction will probably be to reduce the price and sell it quickly. Although this solves the overstocking problem, it also reduces your return on investment. All your financial projections assume that you will receive the full price for your goods. If you slash your prices by 15 percent to 25 percent just to get rid of the excess inventory, you're losing money you had counted on in your business plan.
The final message of the article was in any type of business it is necessary to try to avoid excess inventory establishing a realistic safety margin and order only what you can sell.
Sunday, November 30, 2008
Tuesday, November 25, 2008
Considering a Doomsday View of GM
I have heard a lot of talk in the news about the need for an automotive bailout recently, and I started to think, what would happen if GM went into bankruptcy and the worse predictions came true?
Lets say that GM entered bankruptcy and then demand completely fell off, because people did not want to make a significant investment in a bankrupt car company. Then GM completely folded and so did a number of their suppliers whose only customer was GM. Who would provide service parts to the several million GM vehicles that are currently driving on the roads today?
Every part would have to be analyzed to see if it would be better to stock a large quantity built by the original supplier prior to going out of business, or keep the part machines in production. The expense to keep part machines in production would be small for some parts, like plastic parts, because other suppliers would have the same equipment and would only need to molds to build the GM parts, but what about the others? For example the white body, or frame of the vehicle, that is welded together at the plant. When a customer is in an accident and the frame is severely damaged, then a service part white body is essentially cut up and the replacement frame area is sent to the shop to fix the vehicle. Trying to make these parts without the original equipment would be very costly, but who would operate the original equipment, in this case the equipment is very expensive and can currently only make a profit when it has a high utilization rate. Operating the equipment for service parts may not be feasible, but carrying entire vehicle white bodies does not seem viable either.
This question of service parts would prompt me not to buy a GM vehicle, since I would expect the cost for service parts to increase dramatically if they would be available at all. On the other hand due to the extreme cost of holding service part requirements for the next several years (usually only a couple of months are held)if a company could be very very flexible and somehow produce for all GM makes and models, that company I believe could make a great deal of money in the years following an outright GM closure. Of course if the company were that flexible, I guess it could provide service parts for any company.
Lets say that GM entered bankruptcy and then demand completely fell off, because people did not want to make a significant investment in a bankrupt car company. Then GM completely folded and so did a number of their suppliers whose only customer was GM. Who would provide service parts to the several million GM vehicles that are currently driving on the roads today?
Every part would have to be analyzed to see if it would be better to stock a large quantity built by the original supplier prior to going out of business, or keep the part machines in production. The expense to keep part machines in production would be small for some parts, like plastic parts, because other suppliers would have the same equipment and would only need to molds to build the GM parts, but what about the others? For example the white body, or frame of the vehicle, that is welded together at the plant. When a customer is in an accident and the frame is severely damaged, then a service part white body is essentially cut up and the replacement frame area is sent to the shop to fix the vehicle. Trying to make these parts without the original equipment would be very costly, but who would operate the original equipment, in this case the equipment is very expensive and can currently only make a profit when it has a high utilization rate. Operating the equipment for service parts may not be feasible, but carrying entire vehicle white bodies does not seem viable either.
This question of service parts would prompt me not to buy a GM vehicle, since I would expect the cost for service parts to increase dramatically if they would be available at all. On the other hand due to the extreme cost of holding service part requirements for the next several years (usually only a couple of months are held)if a company could be very very flexible and somehow produce for all GM makes and models, that company I believe could make a great deal of money in the years following an outright GM closure. Of course if the company were that flexible, I guess it could provide service parts for any company.
Thursday, November 6, 2008
Entrepreneur.com
I was looking for some update articles about Operation Management and I run into the magazine Entrepreneur online (Entrepreneur.com). This magazine on its website has a webpage just for Operation Management. The webpage can provide you with interesting information about different topics such as Inventory, Purchasing, Shipping Center and Location. For example, right now there is posted an article about "Tracking Inventory" which I recommend you to read. This is an apart from the article:
" A good inventory tracking system will tell you what merchandise is in stock, what is on order, when it will arrive and what you've sold. With such a system, you can plan purchases intelligently and quickly recognize the fast-moving items you need to reorder and the slow-moving items you should mark down or specially promote."
In brief, If you want to be updated in topics related to Operations Management, Entrepreneur.com would be a good source of valuable information. Take a look at!
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