18. Inventory Control Flashcards
What is inventory?
Raw materials, semi-finished goods and components
Inventories are also called stocks, they are used to make products and then sold to consumers
What are the forms of inventories?
Raw materials and components:
Purchased from suppliers before production-stored by firms to cope with changes in production levels. To avoid delay in production if materials are supplied from stores
Work in progress: partly-finished goods
Finished goods: to keep up with changes in demand
What are the factors influencing inventory levels?
Demand
Stockpile goods
Cost of inventory holding
Amount of working capital available
Lead time
& external factors
How does demand influence inventory levels?
Sufficient stock needs to be kept to satisfy normal demand
How do stock pile goods influence inventory levels?
Inventory ready for higher demand, made saving on cost eg. For Christmas
How does the cost of inventory holding influence inventory levels?
If inventory’s expensive a small quantity will be kept
How does the amount of working capital needed influence inventory levels?
Business short of working capital may not be able to purchase more inventory
How does lead time influence inventory levels?
Amount of time it takes for a delivery stock purchase to be ordered, received, inspected, ready to use
What are buffer stocks?
Emergency stock held in case of a stock shortage
Why might a buffer stock of finished goods be kept?
Might hold buffer stock of finished goods in order to meet sudden increase in demand
If they miss out on surge of demand, they’ll miss sales opportunity & regular customers
Why might a buffer stock of raw materials and components be kept?
Buffer stock of raw materials and components may be needed to protect business from a break in supply leading to a break in production
What are the implications of poor inventory control: holding too much
1- storage cost
2- opportunity cost
3- spoilage costs
4- administrative and financial costs
5- unsold inventory
How are storage costs an implication of poor inventory control (of holding too much)?
Occupy space in building
Pay heating, lighting, labour costs
Some things require very special storage conditions
Firms have to insue against fire, theft, other damages
How are opportunity costs an implication of poor inventory control (of holding too much)?
Capital tied up to inventory earns no rewards, can be put in other uses
How are spoilage costs an implication of poor inventory control (of holding too much)?
Quality of some inventory may deteriorate over time eg. Held too long may become out of date and difficult to sell
How are administrative and financial costs an implication of poor inventory control (of holding too much)?
Cost of placing and processing orders
How are unsold inventory an implication of poor inventory control (of holding too much)?
Unexpected reduction in demand
Creates shrinkage: employees suffer sometimes
What are the implications of poor inventory control (holding too little)?
Business unable to cope with unexpected increase in demand
If inventory deliveries are delayed, firm may run out of inventory and have to stop production
Firms must place more orders, raising total ordering cost and missing out of discounts from bulk buying
How does JIT help management of inventory?
An important part of lean production and the kaizen approach
JIT reduces need of high levels of working capital and improves financial performance by asking suppliers to deliver orders few hours or less before production (to avoid too much money tied up)
What are the advantages of JIT?
Improves cash flow since money not tied up in stock
More factory space made available for productive use
Motivation of workers is improved. They are given more responsibility and encourages to work in teams
Reduces waste and demand stock
What are the disadvantages of JIT?
Faith places in reliability and flexibility of suppliers
Increased ordering and administrative costs
Advantages of bulk buying might be lost
Risk of breakdowns of supply and machinery
Possible loss of reputation if customers are let down by deliveries
What is waste minimization?
Failure to control inventory will = wasted inventory (and money if inventory is perishable (limited lifetime) )
Also if it becomes obsolete after certain period eg. Newspapers or seasonal goods like Mother’s Day cards.
What are methods of minimizing the waste?
Suitable stock rotation method should be adapted (means inventory that was delivered first must be used first)
Many businesses use computers to manage inventory control
Perishable goods need to be transported rapidly. If transportation can be speeded up then goods will reach market space quicker and available for sale in the best condition
To minimize waste a business might find creative methods in the disposable of goods that have passed their sell-by date eg. Recycling newspapers and magazines
What are the aims of lean production
aims to use fewer resources in production
And minimize waste
eg. Kaizen
Flexible manufacturing
Cell production
Teamworking
Empowerment
Multiskilling
