3: Inventory Management and Lean Operations

Question 1

Dependent demand

Answer 1

Items used to produce final products.

Question 2

Independent demand

Answer 2

Items demanded by external customers.

Question 3

Aims of inventory management

Answer 3

Reduce inventory costs to acceptable levels.
Keep inventory costs down.
Match inventory policy to the firm’s ongoing process needs.
Matching sourcing policy to the firm’s ongoing strategic requirements.

Question 4

5 reasons for holding inventory:

Answer 4

Meet unexpected demand.
Smooth seasonal/cyclical demand.
Overcome lead time problems (customers don’t like waiting).
Take advantage of price discounts.
Hedge against price increases.
Reduce dependency on a supplier/customer.
Artifice? - conceal process inefficiencies, poor management practices or poor quality record.

Question 5

ABC Classification System

Answer 5

Classify inventory into 3 categories:
A: 20% of items accounting for 80% of stock value.
B: Next 30% of items accounting for 10% of stock value.
C: Remaining 50% of items accounting for 10% of stock value.

Question 6

Economic Order Quantity (EOQ) model assumptions

Answer 6

Uniform and known demand rate.
Fixed item cost.
Fixed ordering cost.
Constant lead time.

Question 7

EOQ formula

Answer 7

See index cards.

Question 8

Criticisms of EOQ

Answer 8

A simple model.
Cost minimisation (and cost is just one performance metric).
Unrealistic assumptions.
Real costs of stock in operations are not as assumed in the EOQ model, e.g. shelf life.

Question 9

Re-order point (ROP) system

Answer 9

EOQ tells us how much to order, but when do we place that order?
See index cards.

Question 10

Economic Batch Quantity (EBQ) model

Answer 10

See index cards.

Question 11

Just in Time (JIT)

Answer 11

Repetitive production system in which processing and movement of materials and goods occur just as they are needed.
Aims to meet demand instantly with perfect quality and no waste - JIT views inventory as waste.

Question 12

JIT philosophy

Answer 12

Minimise ALL kinds of waste.

Question 13

How is inventory seen as waste?

Answer 13

Requires more storage space.
Requires tracking and counting.
Increases movement activity.
Hides problems.
Increases risk of loss from theft/damage.

Question 14

Benefits of JIT

Answer 14

Cost savings.
Revenue increases.
Investment savings.
Work-force improvements.
Uncovering problems.
Reductions in waste and more sustainable operations.

Question 15

Issues with JIT

Answer 15

Performs best in stable conditions.
Implementing JIT procedures can involve a major overhaul of your business systems.
Little room for mistakes as minimal stock is kept.
Production very reliant on suppliers - if they fail the whole production schedule can be delayed.
No spare product available to meet unexpected demand.