(1) Reasons for holding stock at Boehringer Ingelheim. To meet customer demands. As much as the management of Boehringer Ingelheim had economic pressure to cut costs tied in the inventories, such was not taken seriously since they had valued their customer requirement and they had placed them as their priority. Holding enough inventory to meet customer needs resulted in extreme over-buffering of inventory levels in the pharmaceutical supply chain. Organizations sometimes are faced with a complex network of operations like BI where to predict customer demands or requirements instantaneously could be difficult hence they are forced to hold stock for such eventualities and for the unpredictable customer requirement.
The reason being that once customers find shortages now and then the firm may be at risk of losing customer confidence and they end up shifting for better alternatives. This can affect the firm negatively since the amount of sales may go down and consequently this results on small profit margin. Retaining customer confidence is expensive but in the long run it pays back. (b) Capacity constrain. Due to idle capacity at BI, the management went on increasing more inventories without knowing where, when and how much of each product was required in each market.
Capacity utilization is a good thing since it avoid keeping facilities idle and once are well utilized can be profitable to generate some income and increase the firms’ profitability level. In the process of capacity utilization more and more inventories are held at BI and this has also increased the storage costs of the Pharmaceutical. (c) Uncertainty and variances in the sales forecast. Due to demand management at the pharmaceutical industry, inventories are held to cater for the uncertainties and reduce the variances in the sales forecast.
Generally firms may keep stock in order to take care of the future market fluctuating especially (Drury C, 2004) if the prices of the commodities are expected to increase, firms tend to keep enough stock so as to take advantage of the cheaper purchases price. During irregular market fluctuations, BI may not suffer from such incidents since will maximize its profit once the price of purchases rise. Apart from the above reasons, other factors which generally make mangers hold stock includes: To keep down production cost. When the firms run many machines for a certain production line repeatedly, this increases the cost of production so majority may prefer producing more and reduce the cost of running the machines many times.
This instead increases the inventory in stock. To take advantage of the quantity discount. When firms place big orders they get a high percentage of quantity discounts than when they buy in small quantities. Quantity discount helps the firms reduce ordering cost and increase savings. BI could have considered this option hence keep high inventory levels. To reduce buying costs. Once the firm place order, there are various costs associated with ordering especially transportation, handling, and inspection, stationary (Rushton A, Croucher P, Baker P, 2006).
To minimize making unnecessary frequent orders, firms prefer to cut on such operating expenses and hold huge stock to avoid such increasing expenses.