Ice Cream Business
Beginning a business in a competitive environment is usually a risky endeavor because the variables in the once cream business are always fluctuating. The business owners are typically required to assess their demands and variables to be able to produce the products that will meet the customer’s needs. Economic order quantity tries to balance the objective of making sure that there is enough inventory to help satisfy the demand while taking into consideration the ordering costs, carrying costs, and maintaining them as low as possible. Inventory should be well managed, or there will be the creation of surplus items, create financial losses, extra costs, insurance, taxes, together with issues. Also, less inventory can make the firm unable to meet demand hence lowering sales and profits.
For the ice cream business, which is a small venture as it assists in making informed business decisions. It enables the business to know how many products to order and how to order for the items at much-reduced costs. Besides, the firms get an opportunity of lowering costs that can be used in transportation, storage, and maintaining the excessive inventory (Fauzi, Darti, & Suryanto, 2017). Many companies producing and supplying milk often invest in numerous advertisements that aimed at persuading other retailers and consumers to make a sale. As such, they usually offer discounts on a certain amount of goods purchase. Despite such enticing offers, a business can accumulate costs after purchasing such products in bulk with even some spoiling, thus resulting in more damage. However, an EOQ will ensure I run my business within a manageable budget. An EOQ facilitates appropriate ordering that will avail only the required quantity of products.
For the business to develop ice cream products, numerous variables are required in the production process. All the variables are instrumental in the production of Ice cream products. However, the most significant variable in the creation of ice cream is milk. For the business to manage its inventory well and avoid shortages or surplus ice cream, it will require 150 liters of milk. The business projects an annual demand of 6200. Also, the business anticipates the average cost of one liter of milk to be $ 4, which translates the ordering cost to 4.3. The business further anticipates the holding cost to be 20 % of the whole selling price. The business assumes that the inventory will be depleted at a fixed rate, and the demand will remain constant over the year. At this point, the inventory will arrive to return the inventory at the beginning point. By so doing, the level of shortages is reduced. The EOQ that will be utilized in the reduction of holding and ordering expenses is calculated as follows.
EOQ= {2 * Annual Demand * Ordering Cost/ Holding Cost} 0.5
EOQ=
Annual demand= 6200 * 5
Ordering cost= 4.3
[0.2*4.3* 6200]* 5
Hence EOQ = 816.39 units per year
The units found above imply that they are the maximum amount that I ought to order from the suppliers to serve consumers without encountering shortages and having excess inventory continuously. Having enough inventory will mean that the company has enough inventory to keep its clients. Also, having the above volume of milk will enable the business to operate smoothly even during peak periods when the supply of milk reduces.
References
Fauzi, A. L., Darti, I., & Suryanto, A. (2017, June). Kontrol Optimal pada Model Economic Order Quantity (EOQ) dengan Inisiatif Tim Penjualan. Jurnal Teknik Industri; , 19(1), 21-28. doi:http://dx.doi.org/10.9744/jti.19.1.21-28