inventory management Flashcards
businesses will hold inventories in three distinct forms:
1 Raw materials and components
2 Work in progress
3 Finished goods
Without effective management which serious problems can arise for firms:
■ There might be insufficient inventories to meet unforeseen changes in demand.
■ Inventory wastage might occur due to mishandling or incorrect storage conditions.
■ Very high inventory levels may result in excessive storage costs and a high opportunity cost for the capital tied up.
Inventory-holding costs include
■ Opportunity cost: Working capital tied up in goods in storage could be put to another use
■ Storage costs: Inventories have to be held in secure warehouses
■ Risk of wastage and obsolescence: If inventories are not used or sold as rapidly as expected, then there is an increasing danger of goods deteriorating or becoming outdated.
Costs of not holding enough inventories
■ Lost sales
■ Special orders could be expensive: If an urgent order is given to a supplier to deliver additional materials due to shortages, then extra costs might be incurred in administration of the order and in special delivery charges
■ Small order quantities: Keeping low inventory levels may mean only ordering goods and supplies in small quantities. The larger the size of each delivery, the higher will be the average level of inventories held. By ordering in small quantities, the firm may lose out on bulk discounts, and transport costs could be higher as so many more deliveries have to be made.
Economic order quantity
the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs.
importance of Inventory-control charts or graphs
They aid an inventory manager to determine the appropriate order time and order quantity as well as allowing an analysis of what would happen to inventory levels if an unusual event occurred, such as a competitor operating a really successful promotion campaign
Buffer inventories
the minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase.
Lead time
the normal time taken between ordering new stocks and their delivery.
he longer this period of time, then the higher will have to be the reorder stock level. The less reliable suppliers are, the greater the buff er stock level might have to be.
Re-order quantity
the number of units ordered each time.
This will be influenced by the economic order quantity concept.
Re-order stock level:
This is the level of stocks that will trigger a new order to be sent to the supplier. In practice, it is very common for computers to be used to keep a record of every sale and every delivery of stock
key features of a typical inventory-control chart
■ Buffer inventories ■ Maximum inventory ■ Re-order quantity ■ Lead time ■ Re-order stock level
Just-in-time
this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order.
For JIT principles to be successfully introduced, there are certain very important requirements that a business must ensure are met:
■ Relationships with suppliers have to be excellent: Suppliers must be prepared and able to supply fresh supplies at very short notice
■ Production staff must be multiskilled and prepared to change jobs at short notice
■ Equipment and machinery must be flexible: The machinery would have to produce large batches of one type of component before being converted to making another item
■ The latest IT equipment will allow JIT to be more successful: Accurate data-based records of sales, sales trends, reorder levels and so on will allow very low or zero inventories to be held
The advantages and disadvantages of JIT inventory control
Advantages
■ Capital invested in inventory is reduced and the opportunity cost of inventory holding is reduced.
■ Costs of storage and inventory holding are reduced. Space released from holding of inventories can be used for a more productive purpose.
Disadvantages
■ Delivery costs will increase as frequent small deliveries are an essential feature of JIT.
■ Order-administration costs may rise because so many small orders need to be processed
■ There could a reduction in the bulk discounts offered by suppliers because each order is likely to be very small.
why might JIT not be suitable for all firms at all times:
■ There may be limits to the application of JIT if the costs resulting from production being halted when supplies do not arrive far exceed the costs of holding buffer inventories of key components.
■ Small firms could argue that the expensive IT systems needed to operate JIT effectively cannot be justified by the potential cost savings.
