4 Managing Inventory 34

Question 1

What are the types of inventory?

Answer 1

Raw materials and components
Work in progress
Finished goods

Question 2

Raw materials and components…

Answer 2

These are stocks the business has purchased from outside suppliers; they will be held by the firm until they are ready to process them into its finished output

Question 3

Work in progress…

Answer 3

At any given moment, a manufacturing firm will have some items it has started to process, but they are incomplete.

Question 4

Finished goods…

Answer 4

The firm may keep possession of it for some time; this could be because it sells goods in large batches or no buyer has yet come in for the product.

The firms costs increase if it holds more stock, this needs to be against the Opportunity Cost of keeping too little stock, such as not being able to meet customer demand.

Question 5

What are the influences on the amount of inventory held?

Answer 5

A firm can hold too much or too little inventory. Both cases will add to the costs of the firm

Question 6

What can too much inventory held lead to?

Answer 6

Opportunity costs
cash flow problems
Increased storage costs
Increased finance costs
Increase stock wastage

Question 7

Opportunity cost…

Answer 7

Holding the frim´s wealth in the form of stock prevents it from using its capital in other ways, such as investing in new machinery or research and development on a new product; this may dent its competitiveness

Question 8

Cash flow problems…

Answer 8

Holding the firms wealth as stock may cause problems if it proves slow moving; there may be insufficient cash to pay the suppliers

Question 9

Increased storage costs…

Answer 9

As well as the rental costs of the space needed to hold the inventories, the higher the stock value, the higher the cost of insurance against fire and theft

Question 10

Increased finance costs…

Answer 10

If the capital needs to be borrowed, the cost of that capital (the interest rate) will be significant added annual overhead

Question 11

Increase stock wastage…

Answer 11

The more stock is held, the greater the risk of it going out of date

Question 12

What are the potential costs of holding too little inventory ?

Answer 12

Lost orders
Loss of reputation
Worker downtime

Question 13

Lost orders…

Answer 13

If urgent orders cannot be met because there is to little finished goods stock

Question 14

Loss of reputation…

Answer 14

The loss of the firms reputation and any goodwill it has been able to build up with its customers

Question 15

What is one way a firm can analyze its stock situation?

Answer 15

By using a inventory control chart

Question 16

What is a inventory control chart?

Answer 16

Is a line graph that looks at the level of stock in the forms over time

Question 17

What is lead time?

Answer 17

The time between an order being placed and the supplies being delivered

Question 18

What is Reorder Levels?

Answer 18

When the level of inventory falls due to sale or usage of stock, it may start to approach the buffer stock level (minimum stock level wanted by a business). The business will want the stock reordered early enough for it to arrive before the inventory sinks below that buffer stock level.

Question 19

What is Reorder Quantities ?

Answer 19

The consideration of how much stock to order at one time.

Large orders - made occasionally
Smaller orders - more regularly

Question 20

What are the advantages of many small orders ?

Answer 20

Less storage needed
More flexible to changing needs
Less stock wastage

Question 21

Advantages of few large orders ?

Answer 21

Lower cost per unit due to economies from buying in bulk
Avoids chance of running out from stock
Prevents machines and workers standing die

Question 22

What is Just In Time (JIT) ?

Answer 22

The attempt to operate with zero buffer stock