Chaper 24- inventory management

Question 1

what is inventory?

Answer 1

materials and goods that a business stores for the purpose of resaleee

Question 2

what are the three forms of inventories?

Answer 2

• raw materials and components.
• work in progress
• finished goods.

Question 3

what are the problems of not handling inventory effectively?

Answer 3

• can become obsolete/ outdated (eg. fresh foods or smartphones)
• risk of damage (theft, fire etc)
• supply problems can result in problems. high storage costs in case of big order and less discounts in case of small.
• opportunity cost
• might not have sufficient inventory to fulfill demand

Question 4

what are the costs of holding inventory?

Answer 4

• opportunity cost
• storage costs
• risk of damage.

Question 5

what are the costs of not holding enough inventory?

Answer 5

• lost sales. might lead to bad reputation and future lost sales. might have to pay penalty if there’s a contract.
• idle production resources. if business runs out of raw material then labour and machines will be useless.
• special orders might be expensive.
• small order quantities. discounts may be lost.

Question 6

what is economic order quantity?

Answer 6

the optimum or least-cost quantity of stock to re-order considering delivery and storage costs.

Question 7

what are inventory control charts?

Answer 7

they are used to monitor a firm’s inventory position. they record, over time, the number of goods held, maximum inventory and buffer inventory levels etc.

Question 8

what is buffer inventory level?

Answer 8

the minimum amount of inventory held back to ensure that a firm can cater to unexpected change in demand/ production doesnt stop if there is shortage of raw materials. BIL is higher when delivery times and production levels are uncertain

Question 9

what is maximum inventory level?

Answer 9

The maximum amount of inventory that a firm can hold.

Question 10

what is re order quantity?

Answer 10

the number of units ordered each time.

Question 11

what is lead time?

Answer 11

the number of time taken between the process of placing an order until it gets delivered.

Question 12

what is re order stock level?

Answer 12

the level of stocks that will trigger a new order to be sent to the supplier.

Question 13

what is JIT inventory control?

Answer 13

inventory control method that aims to avoid holding inventories by requiring supplies to arrive just as they are needed and goods are produced to order.

Question 14

what are the requirements of JIT system?

Answer 14

• excellent relationship with supplier. so goods can be delivered urgently
• multiskilled workers
• flexible machinery
• accurate demand forcasts
• latest IT equipment
• excellent employer employee relationships
• quality should be priority

Question 15

what are the advantages of JIT?

Answer 15

• no storage costs
• less opportunity cost
• less risk of damage
• less risk of obsolence
• multi skilled staff more motivated
• flexible machinery quicker response to changes in demand.

Question 16

what are the disadvantages of JIT?

Answer 16

• firms rep depends on suppliers.
• no bulk discounts
• order administration costs may rise.
• delivery costs will increase
• failures will lead to expensive customer delays.

Question 17

is JIT suitable for all firms at all times?

Answer 17

• small firms cant afford IT equipment
• depends on situation. supplies not arriving in JIT costs are far more than holding buffer inevtory.
• rising inflation makes buffer inventories beneficial as prices may rise in future.