Inventory

Question 1

What is inventory?

Answer 1

Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts).

Question 2

What is inventory velocity?

Answer 2

Michael Dell talks about inventory velocity-the speed at which components move through Dell Computer’s operations

Question 3

What is traditional inventory?

Answer 3

Raw materials, components, work-in-progress, finished goods, distribution inventory, maintenance, repair & operating supplies

Question 4

What is Cycle Stock?

Answer 4

Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by the upstream partner.

Question 5

What is Safety Stock?

Answer 5

Extra inventory that companies hold to protect themselves against uncertainties in either demand levels or replenishment time.

Question 6

What is the basic stock calculation?

Answer 6

Basic stock calculation = opening stock – sales + production = closing stock

Question 7

What are 4 inventory types?

Answer 7

1. Anticipation inventory
2. Hedge inventory
3. Transportation inventory
4. Smoothing inventory

Question 8

What is Anticipation inventory?

Answer 8

Inventory that is held in anticipation of customer demand.

Question 9

What is Hedge inventory?

Answer 9

A form of inventory build up to buffer against some event that may not happen. (speculation against rare events).

Question 10

What is Transportation inventory?

Answer 10

lnventory that is moving from one link in the supply chain to another

Question 11

What is Smoothing inventory?

Answer 11

lnventory that is used to smooth out differences between upstream production levels and downstream demand.

Question 12

What are the inventory drivers?

Answer 12

• Supply and Demand Uncertainty
• Business Conditions that force companies to hold inventory

Question 13

What Business Conditions drive inventory?

Answer 13

• Mismatch between a downstream partner’s demand and the most efficient production or shipment volumes for an upstream partner
• Mismatch between downstream demand levels and upstream production capacity
• Mismatch between timing of customer demand and supply chain lead times

Question 14

What is Independent Demand Inventory?

Answer 14

Items whose demand levels are beyond a company’s complete control.

Question 15

What is Dependent Demand Inventory?

Answer 15

Items whose demand levels are tied directly to the company’s planned production of another item.
- The required quantities and timing of dependent demand inventory items can be predicted with great accuracy

Question 16

What is Stock (inventory) Turnover?

Answer 16

• Inventory turnover, or the inventory turnover ratio, is the number of times a business sells and replaces its stock of goods during a given period.
• Inventory turnover can be compared to historical turnover ratios, planned ratios, and industry averages to assess competitiveness and intra-industry performance. Inventory turns can vary significantly by industry.
• It measures the soundness of inventory methods.
• It also indicates poor inventory planning and lack of controlling techniques.

Question 17

What does a high inventory turnover mean?

Answer 17

It means that goods are sold faster

Question 18

What does a low inventory turnover mean?

Answer 18

It indicates weak sales and excess inventories, which may be challenging for a business.

Question 19

What are the 4 inventory valuation methods?

Answer 19

1. The specific identification method
2. The first in, first out method
3. The last in, first out
4. The weighted average method

Question 20

What is the specific identification method?

Answer 20

You track the specific cost of individual items of inventory.

Question 21

What is the first in, first out method?

Answer 21

You assume that the first items to enter the inventory are the first ones to be used.

Question 22

What is the last in, first out method?

Answer 22

You assume that the last items to enter the inventory are the first ones to be used.

Question 23

What is the weighted average method?

Answer 23

An average of the costs in the inventory is used in the cost of goods sold.

Question 24

What happens when we improve inventory turnover?

Answer 24

By improving Inventory Turnover, easily increase profitability by carrying fewer inventories.

Question 25

What is the formula for period stock turn?

Answer 25

Period stock turn = stock/ average period sales

Question 26

What is the formula for stock days?

Answer 26

Stock days = stock/ average sales day rate

Question 27

Why do we use period stock turn?

Answer 27

Period stock turn tells you how well you are managing your resources.

Question 28

Why do we measure stock days?

Answer 28

Stock days give you a deeper insight into how well you are performing during that period.

Question 29

What is a re-order level?

Answer 29

A reorder level is the point at which inventory needs to be replenished in order to continue doing business effectively.

Question 30

Why do we use re-order levels?

Answer 30

• Calculating this level correctly and effectively can help insure your company orders exactly the right amount of product at the right time, to maximize revenue and minimize loss, reducing wastage.
• Accurate reorder levels reduce warehouse costs, or the expenses associated with maintaining inventory.

Question 31

Calculate re-order level

Answer 31

Reorder level = average demand × lead time

Question 32

Calculate re-order level if safety stock is kept

Answer 32

Reorder level = average demand × lead time + safety stock

Question 33

What is Economic order quantity?

Answer 33

• EOQ considers the timing of reordering, the cost incurred to place an order, and the costs to store.
• If a company is constantly placing small orders to maintain a specific inventory level, the ordering costs are higher.

Question 34

What is a disadvantage of Economic Order Quantity?

Answer 34

The basis for the EOQ formula assumes that consumer demand is constant. The calculation also assumes that both ordering and holding costs remain constant.