3.4.5 Making operational decisions to improve performance: managing inventory and supply chains

Question 1

What are stocks (inventories)?

Answer 1

Stocks represent the raw materials, working progress and finished goods held by a firm to enable production and meet customer demand

Question 2

What are the 3 different types of stock (inventories)?

Answer 2

1. Raw materials and components:
   - Bought from suppliers
   - Used in production process
2. Work in progress:
   - Semi or part-finished production
   - E.g. construction project
3. Finished products:
   - Complete and ready for sale

Question 3

What are the benefits of holding inventory?

Answer 3

• Enables production
• Satisfy customer demand
• Precaution against delays from suppliers
• Allow efficient production
• Allow for seasonal changes
• Provide a buffer between production processes

Question 4

What are the main influences on the amount of stock held?

Answer 4

1. need to satisfy demand:
   - failure to have goods available for sale is very costly
   - demand may be seasonal or unpredictable
2. Need to manage working capital:
   - holding stocks ties up cash in working capital
   - there is an opportunity cost associated with stock holding
3. Risk of stock losing value:
   - longer stocks are held, the greater risk that they cant be used or sold

Question 5

What are the costs of holding stocks?

Answer 5

• Interest costs - interest on loans being paid for inventory
• Obsolescence risk - longer held, greater risk of becoming unusable or not capable of being sold
• Storage - some require large spaces, employees and equipment to control and handle
• Stock out costs - loss of sales and goodwill, production stoppages or delays and extra costs of urgent replacement orders

Question 6

What is lead time?

Answer 6

The time between placing an order and receiving it

Question 7

What is buffer stock?

Answer 7

Inventory held as a contingency in case of unexpected orders or delays from suppliers

Question 8

What factors affect when or how much to order?

Answer 8

1. Lead time from supplier:
   - Delivery time
   - Higher might require higher reorder level
2. Implications of stock outs:
   - Dependent on extent of potential damage, better having higher reorder level
3. Demand for product:
   - Higher demand often means higher reorder level

Question 9

What is an analysis of having low inventory levels?

Answer 9

1. Lower holding costs
2. Lower risk of inventory obsolescence
3. Less working capital tied up - used elsewhere in the business
4. Consistent with operating lean production

Question 10

What is an analysis of high inventory levels?

Answer 10

1. Production fully supplied - no delays
2. Potential for lower unit costs through purchasing economies of scale
3. More able to handle unexpected changes in demand for higher output
4. Less chance of stock outs

Question 11

What is JIT?

Answer 11

• Inventory arrives jut a needed

- Lean production = minimal working capital tied up

Question 12

What are the implications of JIT?

Answer 12

• No need for buffer stock
• Holding costs minimised
• Short lead times
• Requires highly reliable suppliers and sophisticated it systems to work effectively

Question 13

What are key evaluation points for inventory control?

Answer 13

• Key part of operating efficiently
• Damage from stock outs or wrong stock can be significant
• Crucial to manage carefully as ties up working capital
• IT systems have made inventory management much easier

Question 14

What is outsourcing?

Answer 14

Delegating one or more business processes to an external provider, who then owns, managers and administrates the selected to processes to an agreed standard