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CIPS L4M7 - Whole-life asset management > Chapter 2.1 > Flashcards

Chapter 2.1 Flashcards

1
Q

Name 4 key distinctions between the way that stock is held by a business and categorised

A
  1. Raw materials, opening stock, work in progress, safety stock and finished goods
  2. Obsolescent and redundant stock
  3. Direct and indirect supplies
  4. ABC classifications of stock that may apply
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2
Q

Opening stock

A

The inventory held at the start of an accounting period

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3
Q

Stocktake

A

An audit check of the stock physically held; this may be by amount or value or both

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4
Q

Finished goods

A

Products ready for sale and/or use

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5
Q

Work in progress (WIP)

A

In inventory management the expression relates to stock that is in the process of being manufactured but is not yet finished. In the services sectors the term is also used for anything between order and delivery

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6
Q

Closing stock

A

The inventory held at the end of an accounting period; becomes the opening stock for the next period

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7
Q

Name 3 times you could use opening stock

A
  1. Start of a financial year
  2. Start of another reporting period
  3. Ad hoc stocktake
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8
Q

What should you not confuse the concept of opening stock with?

A

Raw materials

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9
Q

What are opening and closing stock used to assess?

A

How much inventory is being held either as physical stock or in value terms

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10
Q

Do finished goods have a higher value than raw materials?

A

Yes

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11
Q

Is there a gap between stock accounting periods?

A

No - it is like a bank balance

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12
Q

What is stocktaking?

A

Determining how much inventory is held, or the value of it

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13
Q

Name 2 other reasons for conducting a stocktake

A
  1. On a random basis as a means of checking for suspected fraud or theft
  2. For a valuation of the company prior to the transfer of ownership
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14
Q

What kind of terms are opening and closing stock?

A

Accounting terms

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15
Q

Cycle counting

A

A cyclical process of counting inventory to check system to actual balances

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16
Q

Raw materials

A

The base material from which a product is made

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17
Q

Components

A

A part that makes up a product

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18
Q

What is the normal breakdown of classifying stock (3)

A
  1. Raw materials and components
  2. Work in progress
  3. Finished goods
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19
Q

What is another way of classifying stock?

A

Look at what is physically held and where it sits in the production process

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20
Q

What is work in progress

A

Stock that is being processed - converted from raw material/component to finished article - and has not yet had the final manufacturing process completed

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21
Q

Why is it important to manage the flow of WIP

A

Because if mistakes are made in processing or the sequence of operations is not followed fewer finished goods will be produced for a given amount of input

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22
Q

Name 3 factors that determine how much stock needs to be held at each stage of the production process

A
  1. There must be sufficient raw materials and components stock to ensure that the production can be kept running at its optimal efficiency level without disruptions or downtime
  2. Work in progress should be literally ‘in progress’ - it should not be sitting waiting for orders or waiting for blockages later in the process to be cleared
  3. Finished goods inventory is the most valuable and needs to be the most protected in terms of storage conditions and insurance
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23
Q

Name 2 risks of holding stock for too long

A
  1. Redundancy and obscelence
  2. Overstocking can cause backlogs in the production process making for inefficient use of factory space and equipment
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24
Q

Surplus stock

A

Excess stock over what is required by the organisation

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25
Q

Dead stock

A

Stock which will never be used by the organisation

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26
Q

Redundancy

A

The state of being no longer needed or surplus to requirements

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27
Q

Obselecence

A

The process of becoming outdated or obsolete

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28
Q

Safety stock (buffer stock)

A

Stock held as a contingency or insurance against disruption or unexpected demand

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29
Q

Stockout

A

Having no or insufficient materials to continue production or the finished goods to meet an order

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30
Q

Name 2 reasons you may hold safety stock

A
  1. Prevent disruptions to work in progress affecting the amount of finished goods inventory on hand
  2. Reduces the risk of stockouts, when the organisation is unable to meet an order or continue production due to lack of finished goods or input materials
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31
Q

Name 7 types of stock

A
  1. opening stock
  2. Raw materials
  3. Secondary components
  4. Work in progress
  5. Finished goods
  6. Safety or buffer stock
  7. Stockout
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32
Q

What is the value of raw materials

A

Acquisition cost, lowest value of stock held

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33
Q

What is the value of secondary components

A

higher than raw materials, but still at acquisition cost

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34
Q

What is the value of work in progress

A

Not full value but the costs of processing have already been carried out making it more valuable than materials and components

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35
Q

Whats the value of finished goods?

A

Most expensive and need to be stored in good conditions

36
Q

What is the value of stockout

A

Lost sale and equipment downtime

37
Q

Is safety stock a kind of insurance?

A

Yes

38
Q

Can there be various batches of safety stock at different stages of the production process?

A

Yes

39
Q

What are the two types of stockholdings that are to be avoided as much as possible?

A

Obsolescent and redundant

40
Q

Is obsolete stock a permanent condition?

A

Yes

41
Q

Can redundant stock be used?

A

Yes

42
Q

Describe the demand for redundant stock

A

There is a potential demand for it, just not from the current or intended user

43
Q

Compare obsolete and redundant stock

A

Obsolescent stock is heading towards a position where there will be no demand for it at all. Redundant stock is still marketable, but is not needed by the company that currently owns it

44
Q

Working capital

A

Capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities

45
Q

Written off

A

In relation to costs: accepting that they cannot be recouped; in relations to debts: accepting that they will not be paid; taking a potential ‘asset’ and marking its value down to zero in the accounts

46
Q

When would obsolete stock have a negative value?

A

If you cant turn it into something else or recycling whatever can be reclaimed in the way of raw materials or even simple scrappage to landfill

47
Q

Will obsolete stock cost money and resource to be removed?

A

Yes

48
Q

What will happen to the value of redundant stock?

A

The value may need to be discounted ti allow for the additional storage costs prior to disposal

49
Q

What will happen to the value of obsolete stock?

A

The value will need to be written off (accounted for as zero) in the balance sheet

50
Q

Name 3 causes of obsolescence

A
  1. Technological change
  2. Cultural change
  3. Legislation
51
Q

Name 5 causes of redundancy

A
  1. Poor forecasting of demand
  2. Weak customer relationships leading to cancelled orders
  3. Overstocking/poor stock control
  4. Change in internal policy
  5. Too much variety
52
Q

Name 7 ways of avoiding redundant or obsolete stock

A
  1. Good market knowledge and accurate forecasting
  2. Good stock-control techniques, including regular stock audits to identify slower-moving stock
  3. Good inter-departmental communication so that the impacts of policy changes can be identified in good time and accomodated by running down stocks prior to changes being made or allowing for a phasing in of the change
  4. Just in time supply chains
  5. Reduced batch sizes in production
  6. Good sales and operating planning
  7. Reduced variety
53
Q

Just in time

A

A philosophy used in manufacturing that is based on suppliers delivering goods at the point that they are needed. It aims to reduce inventory costs and reduce waste in the supply chain

54
Q

Book value

A

The notional value of stock as set down in a company’s accounts; it is an estimate of value which may or may not be achieved ir may indeed be exceeded

55
Q

How might you remove redundant stock from your inventory?

A

It could be sold on to another client

56
Q

How might you remove obsolete stock from your inventory?

A

If it is identified early, discounting prices can help sales
You could rework the stock to produce saleable items
You may have to dispose to landfil

57
Q

Name 6 costs associated with surplus, obsolescent and redundant stock

A
  1. Loss of manufacturing capacity
  2. The stockholding costs
  3. Loss of profit on unsold products
  4. Wasted inputs
  5. Loss of working capital
  6. Disposal costs, especially if to landfill
58
Q

What is the key to avoiding obsolescent and redundant stock?

A

Good market knowledge and detailed planning

59
Q

What is another way of categorising supplies?

A

By their function

60
Q

Direct supplies

A

Supplies that are integrated into the finished product

61
Q

Indirect supplies

A

Supplies not incorporated in the finished product but which keep the business and factory operating

62
Q

Inventory strategy

A

The overall approach to how stock is managed, including order points, quantities and values, physical placement of stock etc

63
Q

MRO inventory

A

Maintenance, repair and operations inventory; includes items such as cleaning equipment or office supplies

64
Q

Stock turn / stock turnover (high or low)

A

How many times stock or inventory is being used/sold and purchased/replenished over a given time period

65
Q

Name 3 things that direct supplies have

A
  1. A higher overall value, as a greater quantity is used
  2. Less variety of parts compared with MRO inventory
  3. Quicker turnover (sometimes expressed as ‘higher stockturn’)
66
Q

Pareto principle

A

The theory that 80% of outcomes result from 20% of inputs

67
Q

What is the management of ABC classifications based on

A

The pareto principle

68
Q

What does the pareto principle imply

A

80% of stock value will be held in 20% of the items commonly held as stock items

69
Q

Name the 5 steps of the pareto analysis

A
  1. Give each stock item a code or a part number
  2. Identify the frequency of use for each ‘part’ during a given period
  3. Identify the value of each ‘part’
  4. Multiply the frequency of use during your given period by the value of each part to give a ‘cumulative value per period’ figure
  5. Plot each part number on a graph in descending order of the cumulative value on the x-axis and the total cumulative value of all parts per period on the y-axis. This will produce a pareto curve
70
Q

What is the point of the pareto analysis?

A

To determine sensible volumes of each type

71
Q

Tail spend

A

The bottom 20% of an organisations spend, which usually accounts for 80% of their suppliers. These can be made up of low-value, one-off purchases, may not be under the control of the procurement team and may not be made under contract

72
Q

What is the purpose of classifying the stock as ABC

A

To differentiate on how these parts are managed

73
Q

Describe category A items

A

The most closely managed and controlled. they constitute the smallest in number of stock items (20%) but the largest in value (80%)

74
Q

What does having a smaller number of parts classified as A allow for?

A

Greater visibility of stock turnover. Its easier to focus on a smaller number of items so these high-value parts can be more closely managed

75
Q

What can stockouts of any part do?

A

Stop a whole production line

76
Q

What 3 things are necessary to keep production facilities working whilst ensuring that capital is not tied up in warehouses full of category A stock

A
  1. Having good stock control
  2. Adjusting demand for any seasonal variations
  3. Having responsive and agile suppliers
77
Q

How often should you check category B items?

A

Weekly or monthly

78
Q

Describe category B items

A

Medium-value items accounting for 15% of the total value and on average about 30% of the total number of parts

79
Q

What is less of a financial challenge for category B items

A

Balancing the risk of stockout against using buffer stock

80
Q

Stock profile

A

The description of stock items in terms of value, rate of turnover, storage characteristics

81
Q

Should any of the stock categorisation or stock profiling methods be used in isolation?

A

No

82
Q

Why do category B parts need less tight controls than Category A items?

A

Due ti the lower value

83
Q

Describe category C items

A

They are usually ordered as required, with frequent orders and often large batch sizes. these are low value items making up 5% of the total value, but 50% of the total part number count

84
Q

How may you monitor and control such a large amount of part numbers of low value (category C items)

A

Have a simple stock reordering system, using a minimum stock level with a larger ordering quantity

85
Q

Describe category A items in a sentence

A

It has the lowest number of items, but the highest value - it needs the greatest input of stock-management resource

86
Q

Describe category B items in a sentence

A

Medium number and middle value - it needs direct focus but far less resource input than category A

87
Q

Describe category C items in a sentence

A

Have a large number of items but account for little capital investment - this is tail end spend

CIPS L4M7 - Whole-life asset management (9 decks)

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