Inventory

Question 1

Inventory management

Answer 1

Holding and paying for inventory is a major investment for many entities. Efforts to reduce the levels of inventory held and the resulting costs should be considered

This is another balance act between liquidity (reducing inventory to minimise level to be funded) and profitability (ensure sufficient inventory is held so it does not interrupt the business)

Question 2

Problems with keeping high levels of inventory?

Answer 2

The forgotten interest that I’ve lost from buying in inventory as cash is tied up

Holding costs such as storage, administration and risk of theft or damage

Question 3

What are the problems of keeping inventory levels too low?

Answer 3

High re-order or set up costs

Stockouts which lead to loss of contribution , production stoppages and emergency orders

Lost quantity discounts as you miss out on bulk buying

Question 4

What are the two inventory management systems?

Answer 4

Periodic review
Inventory are reviewed at fixed intervals and then made up to a predetermine levels . This considers the likely demand before the next review and likely demand during the lead time

Just in Time (JIT) systems
This aims to minimise inventory levels and improve customer service by manufacturing at the exact time customer require, in the exact quantities they need, at a competitive price.
This means in inventory is reduced to an absolute minimum or eliminated altogether .

Question 5

What are the pros and cons of the just in time system?

Answer 5

Pros
- Smooth flow of work through the manufacture plant
- a flexible production process which is responsive to the customers requirements
- reduction in capital tied up in inventory

Cons
- Can’t meet unexpected demands
- buying in small quantities so I miss out on bulk discount
- Relying on suppliers to deliver quickly
- No backup or buffer stock

Question 6

What is the economic order quantity model?

Answer 6

Aim of the EOQ model is to minimise a total cost of holding and ordering inventory so the focus is purity and profitability

EOQ= 2x cod over chips
Cod - cost per order x demand
Chips - cost of holding one unit for a year

Question 7

What assumptions are made in the EOQ model?

Answer 7

Demand and leadtime are constant unknown

Purchase price is constant

No buffer inventory is held

It assumes it is possible to order that quantity