Chapter 24: Inventory management

Question 1

Inventory

Answer 1

Materials and goods held by a business and required to allow for the production of products and their supply to the customer

Question 2

Reasons for holding inventory

Answer 2

1. Raw materials
2. Work in progress
3. Finished goods

Question 3

Inventory management

Answer 3

Process of ordering, storing and using a company’s inventory

Question 4

Ineffective inventory management leads to

Answer 4

1. Inventory may not be enough to meet demand changes
2. Out-of-date products if rotation is not implemented
3. Inventory wastage
4. High inventory has high costs

Question 5

Costs of holding inventory

Answer 5

1. Opportunity costs
2. Storage costs (Secure warehouse, special requirements)
3. Risk of wastage (Outdated goods, deteriorated goods)

Question 6

Benefits of holding inventory

Answer 6

Reduces risk of lost sales
Allows for continuous production
Avoids the need for special orders from suppliers
Large orders of new supplies reduce costs

Question 7

Economic order quantity

Answer 7

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

Question 8

Inventory control charts

Answer 8

Used to monitor a firm’s inventory position

Question 9

Buffer inventory

Answer 9

The minimum inventory level that should be held to ensure continuous production is possible should delivery delays occur or output increase

Question 10

Maximum inventory level

Answer 10

The level of inventory that fits under the available storage space

Question 11

Re-order level

Answer 11

Level of inventory that triggers a new order to be sent to suppliers

Question 12

Re-order quantity

Answer 12

Number of units ordered each time

Question 13

Lead time

Answer 13

Time between ordering supplies and delivery

Question 14

Supply chain

Answer 14

The network of all the businesses and activities involved in creating a product for sale, starting with the delivery of raw materials and finishing with the delivery of the finished product

Question 15

Supply chain management

Answer 15

Handling the entire production flow of a product to minimise costs but improve customer service

Question 16

How supply chain management aims to reduce costs

Answer 16

Establishing good connections with suppliers
Cutting time to deliver materials by improving transport
Speeding up product development, more competition
Speeding up production through technology
Minimising waste at all production stages reduces prices

Question 17

Benefits of effective supply management

Answer 17

Improves customer service (fast delivery)
Reduces operating costs (less inventory/purchase costs)
Improves profitability (Reduced time, low cost)

Question 18

Just-in-time (JIT) inventory management

Answer 18

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 19

Just-in-case (JIC) inventory management

Answer 19

Aims to reduce the risk of running out of inventory to the minimum by holding high buffer inventory levels

Question 20

Advantages of a JIT approach

Answer 20

1. Capital invested ad opportunity cost of inventory are reduced
2. Storage costs are reduced
3. Less chance of outdated or obsolete inventory
4. Greater flexiibility for quicker response times to demand change
5. Multi skilled staff may gain motivation

Question 21

Disadvantages of a JIT approach

Answer 21

Late deliveries lead to expensive production delays
Frequent delivery costs due to many small orders
Order administration costs may rise due to small orders
Reduction in bulk discounts
Business reputation depends on reliability of suppliers

Question 22

Advantages of the JIC approach

Answer 22

Little chance of running out of inventory
Less need for accurate sales forecasting
Economies of scale are possible

Question 23

Disadvantages of the JIC approach

Answer 23

High capital costs of finance invested in inventories
High storage, inventory and other costs for inventory
Inventories could lose value if fashion changes

Question 24

Conditions for JIT to operate successfully

Answer 24

Excellent supplier relationships
Production employees must be multi-skilled and flexible
Equipment and machinery must be flexible
Accurate demand forecasts
IT equipment is needed for JIT
Excellent employee-employer relationship
Quality must be everyone’s priority