Question

In: Operations Management

What is the danger of over supply of raw materials?  

What is the danger of over supply of raw materials?  

Solutions

Expert Solution

Raw materials are the substances or unfinished goods used by a company in order to produce final or finished goods. In order to ensure that the quantity of raw material matches the actual demand of goods by the end customers, it is important for the organizations to continuously forecast and monitor demands. Managing raw materials in its supply chain is an important function of the organizations that affects their profitability. When the raw materials are supplied in quantities more than what is actually needed to meet the forecasted demand, it may lead to unnecessary additional costs for the manufacturer or company in the form of added Inventory costs and also in the wastage of raw materials if it remain un-utilized during a particular production cycle.

Take the example of a McDonald’s outlet. Suppose the supply of the buns used in making the burgers is higher than what can actually be consumed in the particular outlet depending on the customer demand. The store will have to make additional arrangements to accommodate the exceeded supply of buns. This may result in increased inventory holding costs and labour costs for the outlet. Also, if the buns are preserved for a longer period of time than its shelf life, owing to the lower demand of the burgers in the outlet, the buns may become rotten and unsuitable for consumer consumption adding to further losses for the outlet.

In case the outlet decides to sell burgers at a lower cost (known as the salvage value) in order to induce demand for burgers, the outlet may still suffer losses because of overage costs. Overage costs is defined as the costs incurred because of over-ordering of raw materials. Overage cost is calculated as, Actual value - Salvage value.

Therefore, it is important that the companies incorporate suitable forecasting methods to accurately forecast demand and accordingly manage their raw materials in the supply chain management in order to remain profitable and increase their profit margins by saving above discussed costs.


Related Solutions

an example of supply chain for a specific product and mention the raw materials, components, final...
an example of supply chain for a specific product and mention the raw materials, components, final products, and buyers
Supply chain management is the management of activities that transform raw materials into intermediate goods and...
Supply chain management is the management of activities that transform raw materials into intermediate goods and final products, and that deliver those final products to customers.    True False 2. The challenges of the global supply chain include: geographical distances foreign market forecasting exchange rates fluctuations infrastructural inadequacies all of the above 3. Describe the bullwhip or whiplash effect in the supply chain. How do you propose to minimize its impact in your individual project? 4. Forward integration activities are...
7. One of the options for raw materials supply being available (quantity, timing) in order to...
7. One of the options for raw materials supply being available (quantity, timing) in order to absorb supplier delivery uncertainties is __________ safety stock transfer stock estimated stock none of the above 10. In projects there are usually 3 distinct project objectives, which are ________. cost, planning and performance planning, schedule and performance cost, schedule and performance none of the above 15. Basic strategy of time-series forecasting is to identify _____________ of each component on the basis of available past...
Raw materials purchased on account, $210,000. Raw materials used in production, $191,000 ($152,800 direct materials and...
Raw materials purchased on account, $210,000. Raw materials used in production, $191,000 ($152,800 direct materials and $38,200 indirect materials). Accrued direct labor cost of $50,000 and indirect labor cost of $21,000. Depreciation recorded on factory equipment, $104,000. Other manufacturing overhead costs accrued during October, $130,000. The company applies manufacturing overhead cost to production using a predetermined rate of $7 per machine-hour. A total of 76,300 machine-hours were used in October. Jobs costing $513,000 according to their job cost sheets were...
supply chain la a specific product; mention the raw materials, components, final products, and buyers
supply chain la a specific product; mention the raw materials, components, final products, and buyers
Purchased raw materials on account $46,300. 2. Raw Materials of $36,000 were requisitioned to the factory....
Purchased raw materials on account $46,300. 2. Raw Materials of $36,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,800 was classified as indirect materials. 3. Factory labor costs incurred were $59,900, of which $51,000 pertained to factory wages payable and $8,900 pertained to employer payroll taxes payable. 4. Time tickets indicated that $54,000 was direct labor and $5,900 was indirect labor. 5. Manufacturing overhead costs incurred on account were $80,500. 6. Depreciation on...
What is the danger of excessive individualism according to Durkheims theory? Is the danger positive or...
What is the danger of excessive individualism according to Durkheims theory? Is the danger positive or negative?
Describe Natural Gas' supply chain from raw materials to consumer, and how it's financially traded.
Describe Natural Gas' supply chain from raw materials to consumer, and how it's financially traded.
Marcelino Co.'s March 31 inventory of raw materials is $83,000.Raw materials purchases in April are...
Marcelino Co.'s March 31 inventory of raw materials is $83,000. Raw materials purchases in April are $530,000, and factory payroll cost in April is $385,000. Overhead costs incurred in April are: indirect materials, $57,000; indirect labor, $24,000; factory rent, $37,000; factory utilities, $20,000; and factory equipment depreciation, $61,000. The predetermined overhead rate is 50% of direct labor cost. Job 306 is sold for $665,000 cash in April. Costs of the three jobs worked on in April follow.Job 306Job 307Job 308Balances...
Marcelino Co.'s March 31 inventory of raw materials is $83,000. Raw materials purchases in April are...
Marcelino Co.'s March 31 inventory of raw materials is $83,000. Raw materials purchases in April are $530,000, and factory payroll cost in April is $385,000. Overhead costs incurred in April are: indirect materials, $57,000; indirect labor, $24,000; factory rent, $37,000; factory utilities, $20,000; and factory equipment depreciation, $61,000. The predetermined overhead rate is 50% of direct labor cost. Job 306 is sold for $665,000 cash in April. Costs of the three jobs worked on in April follow. Job 306 Job...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT