Operations Management

1. What is meant by the expression, “All Inventory is Bad.” Explain why this phrase, while correct 80% of the time, needs to be selectively implemented. In addition, explain the pitfalls associated with excess inventory.

When a company holds on to too much inventory it can lead to many problems within the company regarding their finances, operations and supply chain. Thus often times you may hear the phrase “all inventory is bad”; however, while correct 80 percent of the time, cutting down on the amount of inventory a company has needs to be selectively implemented. There are many reasons why when using different methods to cut down on inventory and prevent issues that follow when a company holds on to too much inventory is important. One vital tool that a company needs to consider carefully implementing is forecasting demand. Although forecasting can be tuff, if you get rid of too much inventory there will a be a great chance of an increase in back orders which is also shown to significantly increase the amount of returns and dissatisfied customers. A second issue that may arise with an inaccurate or poor forecast can be having too much inventory than you expected to sell. If a company orders much more of a product then it expected to sell they will face higher cost because they will have to pay to warehouse that merchandise.

The Graph bellow represents a company that made a forecast that exceeded demand for LED backlights and back lighting applications by 30% in 2011. Although they overestimated the demand for LED lighting applications, the graph also shows a forecasted increase in 2012 due improvements in the sales of products that use the LED lighting applications.

While it may be necessary to hold a certain amount of inventory, the amount should be kept as low as possible. Carrying excessive inventory may lead to a variety of pitfalls within a company. For example, some of the issues that may arise include, extra warehousing