Inventory Managaement

Question 1

What are reasons of why firms carry inventory?

Answer 1

Reasons for carrying inventory include:

1. Hedging against supply uncertainty (vendors may have financial difficulties or shipments may be delayed)
2. Hedging against demand uncertainty (high levels of inventory allow a firm to take advantage of unexpected customer orders)
3. Ensuring that operations are not interrupted by inventory shortages

Question 2

What are factors that influence the inventory level of a firm?

Answer 2

Factors influencing the level of inventory. The optimal level of inventory is the one that

1. Considers the reasons why firms carry inventory
2. Minimizes total inventory cost

Question 3

What are the costs related to inventory?

Answer 3

Cost related to inventory - minimizing total inventory cost involves constant evaluation of the tradeoffs among the 4 components of the total:

Purchase costs + Carrying costs + Ordering costs + Stock-out costs

Question 4

What are purchase costs related to inventory?

Answer 4

Purchase costs are the actual invoice amounts charged by suppliers. This is also referred to as investment in inventory

Question 5

What are carrying costs associated with inventory?

Answer 5

Carrying costs are associated with holding inventory:

a. Storage
b. Insurance
c. Security
d. Inventory taxes
e. Deprecation or rent facilities
f. Interest
g. Obsolescence and spoilage
h. Opportunity cost of funds invested in inventory

Question 6

What are Ordering costs associated with inventory?

Answer 6

Ordering costs are the fixed costs of placing an order with a vendor. They are independent of the number of units ordered. For internally manufactured units, they are the costs of setting up a production line

Question 7

What are Stock-out costs associated with inventory?

Answer 7

Stock-out costs are the opportunity cost of missing a customer order. These can also include the costs of expediting a special shipment necessitated by insufficient inventory on hand

Question 8

How can stock-outs be minimized?

Answer 8

Stock-out costs can be minimized only by incurring high carrying costs

Question 9

How can carrying costs be minimized?

Answer 9

Carrying costs can be minimized only by incurring the high fixed costs of placing many small orders

Question 10

How can ordering costs be minimized?

Answer 10

Ordering costs can be minimized but only at the cost of storing large quantities

Question 11

What is lead time?

Answer 11

Lead time is the time between placing an order with a supplier and receipt of the goods. When lead time is known and demand is uniform, goods can be timed to arrive just as inventory on hand is exhausted. This is the foundation of the just-in-time model

Question 12

What is the Reorder point equation?

Answer 12

Reorder point equation is the following:

= (Average daily demand x Lead time in days) + Safety stock