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UPSC MainsMANAGEMENT-PAPER-II20145 Marks
Q7.

What is the minimum total inventory cost for the WeWe paint?

How to Approach

This question requires a quantitative approach, likely involving Economic Order Quantity (EOQ) or similar inventory management models. The question is incomplete as it doesn't provide the necessary data (demand, ordering cost, holding cost). We will assume reasonable values for these parameters to demonstrate the calculation process and explain the concept of total inventory cost. The answer will focus on explaining the components of total inventory cost and how to minimize it, culminating in a calculated minimum cost based on assumed values. The structure will involve defining key terms, explaining the EOQ model, applying it with assumed data, and finally, presenting the minimum total inventory cost.

Model Answer

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Introduction

Inventory management is a critical aspect of operations management, directly impacting a company’s profitability and customer satisfaction. Total inventory cost encompasses all expenses associated with storing and managing inventory, including ordering costs, holding costs, and shortage costs. Efficient inventory control aims to minimize these costs while ensuring sufficient stock to meet demand. For WeWe paint, determining the minimum total inventory cost requires a systematic approach, often utilizing models like the Economic Order Quantity (EOQ) to balance ordering and holding costs. This analysis is crucial for optimizing working capital and maintaining a competitive edge in the paint industry.

Understanding Total Inventory Cost

Total inventory cost (TIC) is the sum of all costs related to ordering and holding inventory. It can be broken down into the following components:

  • Ordering Costs: These are the expenses incurred each time an order is placed. They include administrative costs, shipping charges, and receiving costs.
  • Holding Costs (Carrying Costs): These are the costs associated with storing inventory, such as warehouse rent, insurance, spoilage, obsolescence, and the cost of capital tied up in inventory.
  • Shortage Costs (Stockout Costs): These costs arise when demand exceeds available inventory, leading to lost sales, customer dissatisfaction, and potential damage to reputation. While important, we will focus on minimizing ordering and holding costs for this problem.

The Economic Order Quantity (EOQ) Model

The Economic Order Quantity (EOQ) model is a classic inventory management technique used to determine the optimal order quantity that minimizes total inventory costs. The formula for EOQ is:

EOQ = √(2DS / H)

Where:

  • D = Annual demand in units
  • S = Ordering cost per order
  • H = Holding cost per unit per year

Applying EOQ to WeWe Paint (with Assumed Data)

Since the question doesn't provide the necessary data, let's assume the following for WeWe paint:

  • Annual Demand (D) = 10,000 gallons
  • Ordering Cost (S) = ₹50 per order
  • Holding Cost (H) = ₹5 per gallon per year

Using the EOQ formula:

EOQ = √(2 * 10,000 * 50 / 5) = √(200,000) = 447.21 gallons

Therefore, the optimal order quantity for WeWe paint is approximately 447 gallons.

Calculating Minimum Total Inventory Cost

Now, let's calculate the total inventory cost using the EOQ:

  • Total Ordering Cost: (Annual Demand / EOQ) * Ordering Cost = (10,000 / 447) * 50 = ₹1118.61
  • Total Holding Cost: (EOQ / 2) * Holding Cost = (447 / 2) * 5 = ₹1117.50
  • Total Inventory Cost (TIC): Total Ordering Cost + Total Holding Cost = ₹1118.61 + ₹1117.50 = ₹2236.11

Therefore, the minimum total inventory cost for WeWe paint, based on the assumed data, is approximately ₹2236.11.

Sensitivity Analysis and Considerations

It’s important to note that the EOQ model is based on several assumptions, such as constant demand and lead times. In reality, these factors can fluctuate. Therefore, a sensitivity analysis should be conducted to assess the impact of changes in demand, ordering costs, and holding costs on the optimal order quantity and total inventory cost. Furthermore, factors like bulk discounts, supplier reliability, and storage capacity should also be considered when making inventory decisions.

Conclusion

In conclusion, minimizing total inventory cost for WeWe paint requires a careful balance between ordering and holding costs. The EOQ model provides a valuable framework for determining the optimal order quantity, resulting in a minimum total inventory cost of approximately ₹2236.11 based on our assumed data. However, it’s crucial to remember that this is a simplified model and real-world inventory management requires continuous monitoring, adaptation, and consideration of various influencing factors. Implementing robust inventory management systems and regularly reviewing inventory policies will be key to WeWe paint’s success.

Answer Length

This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.

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Additional Resources

Key Definitions

Just-in-Time (JIT)
An inventory management strategy that aligns raw material orders from suppliers directly with production schedules. It aims to reduce inventory holding costs and improve efficiency.
Safety Stock
Extra inventory held to buffer against uncertainties in demand or lead time. It helps prevent stockouts but increases holding costs.

Key Statistics

Inventory costs typically represent 20-30% of total business costs (Source: APICS, 2023 - knowledge cutoff).

Source: APICS (Association for Supply Chain Management)

Globally, businesses lose an estimated $1.1 trillion annually due to inefficient inventory management (Source: McKinsey, 2022 - knowledge cutoff).

Source: McKinsey & Company

Examples

Toyota Production System

Toyota’s success is largely attributed to its JIT inventory system, which minimizes waste and optimizes production flow. They receive components just in time for assembly, reducing storage needs and costs.

Frequently Asked Questions

▶What if demand is not constant?

If demand is not constant, more sophisticated inventory models like the Safety Stock model or probabilistic inventory models should be used to account for demand variability and prevent stockouts.

Topics Covered

Operations ManagementEconomicsInventory ControlInventory CostsCost OptimizationEOQ
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