Inventory Management and Environmental Responsibility in Business
Optimal Order Model: Wilson’s Model
Wilson’s model helps determine the optimal volume or quantity of an order to optimize the inventory management system.
This model is applicable provided that:
- The company provisions batches of product (purchased from suppliers or made by the production department) of constant amounts, to be determined.
- The demand for the product (total amount purchased from the supplier or manufactured in production) is constant and known throughout the entire management period.
- The price of the product and the time of supply are constant and known.
When the stock level drops to the order point, the administration places a new order. The time between the issuance of the order and the physical receipt of material is the term of supply, i.e., the time it takes the supplier to deliver the material (a parameter that is fixed and known). While the company expects to have the order delivered, the stock level decreases (without falling below the safety stock) until receipt.
Wilson’s model determines that the optimal order is the one that minimizes the costs of inventory management.
ABC Model of Inventory Management
This model is used to rank the importance of various stocks in a firm when it has a wide variety of products and cannot devote the same time or resources to each, as they have different influences on the management of these inventories.
The ABC model is based on the classification of stocks into three categories:
- Stocks A: These are the most important items for supply management, representing approximately 20% of store items and, together, can add up to 60-80% of the total value of stocks. These stocks should be strictly monitored and analyzed in detail, as they have the most significant economic value to the supply.
- Stocks B: These stocks are less relevant to the company than the previous category. However, a control system must be maintained, but much less strict than for category A. They may represent 30% of store items with a value of between 10-20% of the store.
- Stocks C: These are stocks that have little relevance to supply management. Therefore, they should not be specifically checked; approximate, simplified methods are sufficient. They represent approximately 50% of the company’s stock but less than 5-10% of the total value of the store.
The idea behind the ABC model is that each class of stock requires a different control level: the higher the value of inventory items, the stricter the control will be.
As stocks A assume a greater amount of tied-up resources, they should be monitored closely, and it will be necessary to reduce them as much as possible and minimize safety stocks. This often requires detailed demand forecasts, continuous inventory systems, and careful attention to purchasing policy. However, for items in categories B and C, mere observation can be a valid control method, and regular inventory models can be used.
Just-In-Time (JIT) Inventory Management System
The JIT (Just-In-Time) system is an integrated production and supply management system developed in Japan in the 1980s and later applied in the U.S. It is currently used in major industrial companies worldwide.
The JIT system is based on the fact that the company does not manufacture any product until it is needed, that is, until there is a firm customer order or production order. This system has the basic objective of reducing inventory stocks, relating to the immediate satisfaction of customer orders or manufacturing orders. JIT inventory is the minimum stock level to maintain the operation of production and supply of the company effectively.
The JIT system’s purpose is to allocate minimal resources to maintain inventory, reduce lead times and delivery to customers (reacting swiftly to changes in demand), and have an integrated quality system to quickly identify operational problems.
To implement a JIT system in a company, several specific requirements are necessary:
- Greater involvement of staff to identify problems in production and supply and to propose solutions quickly and dynamically.
- Development and use of important engineering applications to adapt production systems and procurement to specifications and system requirements.
- Application of a total quality system that affects the continuous improvement of production and procurement processes.
Externalities of Production
The Company and Environmental Protection
The relationship between the environment and economic activity is very close: the environment provides resources for the production of goods and waste assimilation. Economic activity takes these resources and transforms them (modifies, reduces, or deteriorates them). It is therefore important that this trade (business-environment) is regulated within a framework that promotes the maintenance of productive activity and the maintenance of resources with minimal environmental damage.
To achieve this goal, the company needs to systematically integrate environmental management into its strategy and organization. This integration can have different degrees of implementation and development, based on the company’s ability and the sector in which it is located.
The incorporation of environmental management in the company should be driven by four factors that stimulate this implementation:
- Legislation: Legislation is becoming more restrictive and includes a growing number of civil, criminal, and administrative breaches of environmental legislation. On the other hand, it provides tax incentives to firms investing in environmental protection.
- Society: Environmental degradation affects the image of the company and, therefore, produces economic harm.
- Economic Factors: Attention to the environment can help improve and enrich the company’s competitive advantages.
- Business Ethics: Entrepreneurs and managers are taking on ethical and environmental awareness by incorporating the company’s objectives of reducing damage to the environment and the rational use of resources.
All these factors influence the company by altering its behavior and incorporating two basic objectives of environmental management: to produce or generate waste without polluting and to contribute to not depleting natural resources. A company that develops production processes and products that respect the environment and work with the maintenance of natural resources can be said to observe and implement sound environmental management.
Externalities and Social Cost of Production
When a company makes a product, it generates a cost structure associated with the use of productive factors that are assumed internally and try to regain some margin of profit. In this case, these are internal costs. But in many cases, productive activities lead to effects or costs not included in the company’s cost structure. These are external costs or social costs of production due to the existence of negative externalities (pollution, noise, etc.). On the other hand, there are, but not in many cases, positive externalities, i.e., benefits to other companies or individuals following the development of economic activity.
If we take the example of a company dedicated to tanning hides to make leather goods, the costs for the company are related to its productive activity, to remunerate the factors of production (natural resources, labor, and capital), i.e., they are internal costs or private costs.
However, this company also produces other costs added to its internal costs. These are the costs of pollution generated by production activities on the river where they throw the waste from production. This is a negative externality of production, i.e., the negative effects of a productive activity on the environment, which the company does not reflect in its costs. These costs caused by river pollution are external costs of production, or negative social costs of production, since they do not fall on the company or consumers of its products but on the whole of society.
For this reason, we must begin to resolve the problems of pollution and inadequate protection of the environment with the inclusion of social costs within the structure of the enterprise.
Environmental Industry: Business Opportunities
The environment and its protection are current issues, and a company that incorporates and integrates environmental objectives within its management structure can gain advantages in global competitiveness in the following areas: production efficiency, prestige with consumers, improved market position, and social credibility.
In general, society requires more environmental commitments from companies. This represents a significant effort in resources, techniques, production equipment, innovation, and research, but in turn, it means new business opportunities because new technologies allow the development of production processes, new products, and services.
All this activity in the field of environmental protection has created a new market and has encouraged the emergence of new economic activities. This new environmental industry can act in two ways:
- Reduction of Environmental Impact: By providing facilities that allow the control and treatment of pollution. Producers develop purification technologies and final treatment of waste.
- Environment: Through the transformation of production processes, technology, and operations organization, it acts on the origin of ecological impact, limiting the production of pollutants and reducing resource consumption. In this case, it is about replacing some technologies and some resources with others with less environmental impact.