Costs and Ordering

Question 1

What are unit costs?

Answer 1

The price for an item charged by the supplier.

Question 2

What costs are involved with investing/purchasing in inventory? (Apart from the cost of the inventory itself)

Answer 2

Cost of capital - the interest on loans etc.

Opportunity costs - financial returns which could be gained from investing in areas other than purchasing inventory

Question 3

Name five warehousing costs

Answer 3

1. Rental or purchase costs of the warehouse
2. Taxes
3. Utility bills
4. Insurance
5. Staff

Question 4

What holding costs are involved with inventory?

Answer 4

Insurance, spoilage and obsolescence, security costs and loss.

Question 5

What three costs are involved with ordering inventory?

Answer 5

1. Salary of staff
2. Communication costs
3. Expediting goods if they don’t arrived as planned

Question 6

What does SMED stand for?

Answer 6

Single Minute Exchange Dies

Question 7

What is SMED?

Answer 7

The process of speeding up changeover time between making products.

For example, a bottle making machine that makes coca cola bottles has to have a turnaround to then be able to make 7up bottles. The time a machine is not making bottles it is not making money!

Question 8

What is meant by the economic order quantity?

Answer 8

It is the ideal time to place an order for more inventory, when the carrying costs and ordering costs are at the lowest points.

Question 9

What three costs are incurred when there is a stock-out?

Answer 9

1. Lost profit on customer orders that cannot be met
2. Loss of clients who go elsewhere
3. Additional transport costs to finally satisfy the demand

Question 10

What tradeoff is involved when it comes to shipping costs and the mode of transport chosen?

Answer 10

The more you pay for transport (eg, air) the faster it will be delivered. The less you pay for transport (eg, road haulage) the slower it will be delivered.

Remember, you won’t get paid until deliveries are made!