Demand Management and Forecasting
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Traditional manufacturing methods have historically proven effective insomuch as they allow for firms to hedge against any potential uncertainties in terms of supplier delivery (and quality), production capacity, and market demand. Furthermore, traditional manufacturing methods have always highlighted the importance of cost minimization and product standardization. In other words, the idea is to produce a homogeneous product (one that conforms to a set of technical specifications) at the lowest possible cost. Traditional manufacturing has proven effective over the course of history. In the past, product standardization and cost minimization was achieved through the establishment of economies of scale; hedging through inventory accumulation proved moderately effective.
Today, however, technological innovation, competition, and globalization have all contributed in taking manufacturing methods one step further. Modern manufacturing methods have been developed in an attempt to eliminate the inadequacies that traditional methods have evidenced in recent years. First, even though hedging through inventory accumulation was perceived as the best thing to do in the past, today it becomes clear that elevated inventories generates excess costs. In order for firms to harness sustainability and success in today’s market, they must strive to be more efficient and productive. In a word, they need to be more competitive, and this necessitates cost minimization. Furthermore, it is important to note that cost is not only negatively affected by excess inventories, but also by costing approach that has proven ineffective. Management costing has traditionally focused on productive processes, as opposed to activities. Each process consists on various productive activities; each activity has its own costs. Therefore, it becomes clear that by focusing on the process instead of its constituting activities, cost accuracy decreases significantly (as individual activity costs can easily be understated or overstated).
Despite the advantages associated with traditional manufacturing (hedging through inventory accumulation; product standardization; cost minimization), today’s business environment requires that firms be more competitive. Benchmarking is a top priority, and as globalization and technological innovation continues to be the norm, firms need ways of pushing efficiency up and costs down (simultaneously). The firm, based on what has been said thus far, needs to enhance efficiency and minimize costs; the solution lies in reducing inventories significantly and enhancing cost accuracy.
In order to achieve this, modern approaches to both manufacturing and cost management are proposed. First, the implementation of Just in Time (JIT) manufacturing is proposed; “JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality within manufacturing and nonmanufacturing processes” (Bukata, 2008). JIT focuses on reducing factory inventories to the bare minimum; the idea is to procure raw materials in the exact quantities needed for production and exactly at the time in which they are needed. This might seem a difficult task, but through Electronic Data Interchange (EDI), which is “a method to exchange business information between computer systems” (Lee, 1999) it can be accomplished. It is important, however, to establish a simple, direct network with the firm’s suppliers so that no uncertainty is experienced. Second, Activity Based Costing (ABC) is an approach that focuses on activities (as opposed to entire production processes).
Cost minimization can be maintained, and even enhanced, through ABC given that it will allow the firm to recognize what activities are inefficient (relative to others in the process). In other words, through ABC and JIT the cost saving effects of standardization can be enhanced by keeping minimum inventories and by maximizing efficiency (in terms of managing costs). In the past, traditional managerial methods worked fine, but today the forces of globalization and technological innovation have made competition fiercer; in order to remain competitive it is important to take advantage of the new methods that have been developed in what concerns inventories, costs, and overall production processes.