Chapter 24: Inventory management Flashcards
Inventory
Materials and goods held by a business and required to allow for the production of products and their supply to the customer
Reasons for holding inventory
- Raw materials
- Work in progress
- Finished goods
Inventory management
Process of ordering, storing and using a company’s inventory
Ineffective inventory management leads to
- Inventory may not be enough to meet demand changes
- Out-of-date products if rotation is not implemented
- Inventory wastage
- High inventory has high costs
Costs of holding inventory
- Opportunity costs
- Storage costs (Secure warehouse, special requirements)
- Risk of wastage (Outdated goods, deteriorated goods)
Benefits of holding inventory
Reduces risk of lost sales
Allows for continuous production
Avoids the need for special orders from suppliers
Large orders of new supplies reduce costs
Economic order quantity
The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs
Inventory control charts
Used to monitor a firm’s inventory position
Buffer inventory
The minimum inventory level that should be held to ensure continuous production is possible should delivery delays occur or output increase
Maximum inventory level
The level of inventory that fits under the available storage space
Re-order level
Level of inventory that triggers a new order to be sent to suppliers
Re-order quantity
Number of units ordered each time
Lead time
Time between ordering supplies and delivery
Supply chain
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
Supply chain management
Handling the entire production flow of a product to minimise costs but improve customer service
How supply chain management aims to reduce costs
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
Benefits of effective supply management
Improves customer service (fast delivery)
Reduces operating costs (less inventory/purchase costs)
Improves profitability (Reduced time, low cost)
Just-in-time (JIT) inventory management
Aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order
Just-in-case (JIC) inventory management
Aims to reduce the risk of running out of inventory to the minimum by holding high buffer inventory levels
Advantages of a JIT approach
- Capital invested ad opportunity cost of inventory are reduced
- Storage costs are reduced
- Less chance of outdated or obsolete inventory
- Greater flexiibility for quicker response times to demand change
- Multi skilled staff may gain motivation
Disadvantages of a JIT approach
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
Advantages of the JIC approach
Little chance of running out of inventory
Less need for accurate sales forecasting
Economies of scale are possible
Disadvantages of the JIC approach
High capital costs of finance invested in inventories
High storage, inventory and other costs for inventory
Inventories could lose value if fashion changes
Conditions for JIT to operate successfully
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
