In my last article, I discussed some of the many changes inventory management has undergone in recent decades. A major reason this has become possible is because of the software that is currently in place to help firms make decisions. Decision support software (DSS) is capable of instantly analyzing data that once was nearly impossible to analyze without the aid of computers. What does this result in for us as managers? Better decisions.
Take for example the issue of economic order quantity (EOQ). I mentioned in my first article that this is the quantity that should be ordered to keep the combination of holding costs and ordering costs as low as possible. As an inventory manager, if you are not attempting to optimize your EOQ, then you really are not doing your job. The formula for this is:
EOQ = SqRt [(2 * Demand * Ordering Costs) / Holding Costs]
This is simple enough if demand, ordering costs, and holding costs are all constant, but in reality, this is rarely the case. A typical manager needs to account for fluctuations in all of these variables. Demand typically is the variable that fluctuates the most. Unfortunately, even without fluctuations, determining EOQ for an entire firm can be incredibly time consuming. So how is a manager supposed to have time for anything else? Decision support systems are the most viable option.
Today, software packages are available that integrate a company’s DSS needs. So, for the EOQ example, here is what can be performed with the software package. Bill over in marketing can come up with his most recent sales forecasts. Bill then enters the numbers onto the company’s network. The inventory manager now has an updated demand (one of the variables in EOQ). The inventory manager will then determine the ordering costs and the holding costs and enter those into the system. The amount that eventually gets ordered will transfer over to the finance department where Ted over in accounting will be satisfied because he can instantly get the numbers he needs. Overall, the entire firm is transferring essential information all through the firm’s software network.
Software packages today are capable of finding the EOQ using the information entered. In addition to this DSS will take into account additional variables such as how much warehouse space you have, or how much a supplier will allow you to order based on your line of credit and the software will help you make a more advanced decision based on this information. Still, you might be asking yourself whether you want to spend any of your department’s budget on software that solves the EOQ formula. No should be the answer to this, but DSS is capable of much more.
On its own, EOQ is simple. Mix it with the Re-Order Point (ROP) formulas and aggregate planning and it can become very tricky. Take my word for it when I say that advanced DSS is capable of saving you time. Prior to DSS, I had spent countless hours modeling the best results I could attain using nothing but Microsoft Excel. I once spent 60 hours in a week tweaking an aggregate plan to help minimize the projected costs of a project over its entire life. While I eventually built some pretty powerful spreadsheets, they were never as accurate or time-efficient as the software that had already been written by professionals. That same project I had spent 60 hours on, I might only need to spend 5 hours on with DSS. DSS is very powerful software that is essential to any business that wants to compete.
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