chapter 24- inventory management

Question 1

define inventory (stock)

Answer 1

materials and goods required to allow for the production and supply of products to the consumer

Question 2

define economic order quantity

Answer 2

the optimum or least-cost quantity to re-order taking into account delivery costs and stock-holding costs

Question 3

define buffer inventories

Answer 3

the minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase

Question 4

define re-order quantity

Answer 4

the number of units ordered each time

Question 5

define lead time

Answer 5

the normal time taken between ordering new stocks and their delivery

Question 6

define just in time

Answer 6

this inventory control method aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order

Question 7

name 3 problems that may occur if inventories are not managed effectively

Answer 7

insufficient inventories to meet change in demand, out of date inventories, inventory waste may occur due to incorrect storage conditions, very high inventory levels can cause excess storage costs and high opportunity cost of capital tied up in stock, bad purchasing leads to bad supplier relationships and less likely to get discounts

Question 8

what are the 3 inventory holding costs

Answer 8

opportunity costs, storage costs, risk of wastage and obsolescence

Question 9

name 2 costs of a business not holding enough inventory

Answer 9

lost sales, idle production resources, special orders can be expensive, small order quantities

Question 10

name the 5 main parts of a stock control chart

Answer 10

buffer inventories, maximum inventory level, reorder quantity, lead time, reorder stock level

Question 11

name 3 requirements a business must have to successfully introduce JIT inventory control

Answer 11

the best possible relationships with suppliers, production staff need to be multi skilled and prepared to change jobs on short notice equipment and machinery must be flexible, accuracy demand forecasts, latest IT equipment to give accurate data, excellent employee- employer relationships, quality must be everyones priority

Question 12

give 3 advantages to a business using JIT inventory control

Answer 12

1. capital invested in inventory is reduced and opportunity cost of inventory holding is reduced
2. costs of storage and inventory holding are reduced
3. less chance of inventory becoming outdated
4. greater flexibility that the system demand leads to quicker response times to changes in consumer demand or tastes
5. multi skilled staff required can gain motivation

Question 13

name 3 disadvantages to a business using JIT inventory control

Answer 13

1. any failure to receive supplies or components in time will lead to expensive production delays,
2. delivery costs will increase due to frequent small deliveries
3. order administration costs may rise because so many orders need to be processed
4. there could be a reduction in the bulk discounts offered
5. the reputation of the business significantly relies on outside factors

Question 14

what are the forms of holding inventories

Answer 14

raw materials and components, working in progress, finished goods