Inventory Management Flashcards
What is inventory ?
Inventory is one of the most important aspects of a business. Inventory refers to any items or resources that are owned by the business. There are different types of inventory which are raw materials, work-in-progress and finished goods.
What is the importance of inventory?
- Materials can be purchased in bulk. When this occurs businesses would receive a discount as well as a reduction the level of transportation cost. Transportation cost is cut as the business wouldn’t not have to go back by the supplies in a long time before it would need more stock, therefore cutting transportation costs in bringing the inventory to the business often. E.g the business would buy 2 to 3 months worth of inventory therefore allowing that not to go back for the next 3 months.
- Holding stock is important as it makes the materials readily available when it is required for production. It prevent the business from running of materials especially in critical times and also prevents the business from losing customers due to a shortage in inventory. That is why firms are advise to always hold stock, since, suppliers may not always be able to delivery the inventory fast enough for when it is needed.
- It allows firms to response to a change in demand very quickly due to the fact that they are holding stock. When firm hold stock they are able to respond to an increase in demand very easliy bec they have finished goods available and continue to prodce more units
What does inventory control consist of ?
The amount of stock the business is holding is an important aspect of inventory control. Holding too much stock can lead to serious reprecussion for the business such as:
- wastage due to spoilage
-Stock becoming outdated
- increased storage cost
However holding too little stock results in production hold ups and a loss in sales revenue.Therefore, the business must ensure that it has the most effective inventory management control system
What is economic order quantity ?
It is a system by which the business at a specfic point in time places an order and determines the amount of inventory to be purchased , ensuring that it is not over or under stocking the business. They accompish this and reduce the cost of holding cost by calculating the economic order quantity.
What is the formula for economic order quantity ?
EOQ = square root of: [2(setup costs)(demand rate)] / holding costs
Explain the just-in-time method.
This is where little stock if any is held by the firm. The order for raw materials is only placed when it is needed for production just in time. This method would only be effectively if the business, has a supplier who is able to delivery material in the most efficient matter possible, therefore making supplies readily available tp the business. The time between placing and order and the delivery of the finished good is little the business must have a strong corrdination between the main shareholders of the business. Which are the customers, suppliers, workers and the company. The suppliers must be able to supply high quality raw materials on time, so that production can take place within a specfic time frame. This method reduces the cost of holdong stock and minising waste.
What are two (2) features of Just in time ?
- High quality raw materials
- Standardisation
What are four advantages of just in time ?
- It lowers stockholdering cost significantly
- It reduces funds that are tied up in stock
- The space that was previously occupied by inventory would be freed up
- It emphasises on quality control among the stakeholders
What are four disadvantages of just in time ?
- The business would be unable to respond quickly to any increases in demand
- If the machines of the breakdown it would have harmful effects on the firms as it doesn’t hold any stock of finished goods
- The business relies on suppliers for quailty is can be concerning
- There is no room from mistakes as minimum amount of stock is held.
