4.3: Inventory management

Question 1

Def. Stock (Inventory)

Answer 1

Materials and goods required to allow for the production and supply of products to the customer.

Question 2

What are the three forms of stock held?

Answer 2

Raw materials and components
Work in progress: Stock being converted from raw materials to finished goods
Finished goods

Question 3

Why is stock management crucial?

Answer 3

To avoid:
* Insufficient stock to meet unforeseen changes in demand
* Out of date stock
* Stock wastage from mishandling stock
* Very high stock level which will result in excessive storage cost and high opportunity cost
* Late deliveries and too large or small deliveries

Question 4

What are the stock holding costs?

Answer 4

Opportunity cost
Storage costs
Risk of wastage and obsolescences

Question 5

What are the costs of not holding enough stock

Answer 5

Lost sales
Idle production resources
Special orders could be expensive e.g. urgent orders
Small order quantities

Question 6

Def. Economic order quantity

Answer 6

The optimum or least-cost quantity of tock to re-order taking into account delivery costs and stock holding costs.

Question 7

What are the variables (and their definitions) for a graphical approach of controlling stock levels? (5)

Answer 7

• Buffer stock: The minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase
• Maximum stock level: Limited by space or by financial costs of holding even higher stock levels.
• Re-order quantity: the number of units ordered each time, influenced by economic order quantity.
• Lead time: The normal time taken between ordering new stocks and their delivery.
• Re-order stock level: Level of stock that will trigger a new oder to be sent to the supplier.
  The graph: book pg. 422

Question 8

Def. JIT

Answer 8

Just in time: This stock-control method aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production, and completed products are produced to order.

Question 9

What are the requirement for JIT to work? (7)

Answer 9

The relationships between suppliers have to be excellent
Production staff must the multi-skilled and prepared to change jobs at short notices
Equipment and machinery much be flexible
Accurate demand forecasts
The latest IT equipment
Excellent employee-employer relationship
Quality must be made everyone’s priority

Question 10

Advantages of JIT (4)

Answer 10

A
Capital (for inventory) and opportunity costs, storage costs (from stock holding) are reduced
Reduced risks of outdated or damaged inventory
Quicker response time for consumer demands
Motivation for employees due to range of work

Question 11

Disadvantages of JIT (2)

Answer 11

Any failures like worker strikes or transport problems may lead to expensive production delays
Increase in delivery costs due to need to small deliveries (no purchasing economies of scale).

Question 12

What is JIC?

Answer 12

Just in case - holding a lot of inventory in preparation of any malfunctions in the production system.