Inventory Management

Question 1

How are stocks held?

Answer 1

1. Raw materials and components.
2. Work in progress.
3. Finished goods.

Question 2

Why should inventories be managed in an effective way?

Answer 2

1. Insufficient stocks to meet demand.
2. Out of date stock held if an appropriate stock rotation system is not used.
3. Stock wastage.
4. Excessive storage costs.
5. No space in the warehouse if no efficient stock management is maintained.

Question 3

What are costs of holding inventory?

Answer 3

1. Inventories require secure warehouses, refrigeration, and employee protection. Insurance is recommended for theft, fire, or flood damage. Borrowing finance incurs interest charges.
2. Inventory wastage and obsolescence risk arise when inventories are not used or sold promptly, leading to goods deteriorating, lowering their value, and potentially lowering their selling price.

Question 4

What are benefits of holding inventory?

Answer 4

1. A business can avoid special orders from suppliers when inventory runs out, reducing costs associated with administration and delivery charges.
2. Holding inventories prevents production from stopping due to shortages of raw materials and components, reducing costs of lost output and wasted resources.
3. High inventory levels in businesses reduce the risk of lost sales due to poor customer service, as they offer customers more choices and reduce the availability of products.

Question 5

What are benefits of effective supply chain management?

Answer 5

1. Improves profitability: reducing wasted time, improving
   inventory management and creating a low-cost but efficient
   supply chain, business profits should increase.
2. Good supply chain management enhances customer satisfaction by ensuring timely and high-quality product delivery.

Question 6

What are advantages for a JIT approach?

Answer 6

1. Investment in inventory is reduced, thereby reducing the opportunity cost of holding inventory.
2. JIT’s increased flexibility facilitates faster responses to changes in consumer demand or tastes.
3. Reduction in storage and inventory holding costs allows for more efficient use of space, thereby reducing overall operational expenses.

Question 7

What are disadvantages for a JIT approach?

Answer 7

1. Delivery costs will increase as frequent small deliveries are an essential feature of JIT.
2. Order administration costs may rise because so many small orders need to be processed.
3. Suppliers may decrease bulk discounts due to the small size of each order.

Question 8

What are advantages for a JIC approach?

Answer 8

1. Less need for accurate sales
   forecasting than with JIT.
2. Economies of scale from very large orders of supplies/components are possible.
3. Inventory shortages are rare, and production levels can be maintained despite significant delays in material or component supply.

Question 9

What are disadvantages for a JIC approach?

Answer 9

1. High capital cost of finance invested in inventories.
2. High storage, insurance and other costs are associated with inventory holdings.
3. Inventories could lose value if fashion or technology changes while they are being held.

Question 10

What are the requirements for JIT to be successful?

Answer 10

1. Excellent relationships with suppliers.
2. Production staff must be multi-skilled.
3. Equipment and machinery should be flexible.
4. Accurate demand forecasts.
5. The latest IT equipment.
6. Employee-employer relationship should be good.
7. Quality must be everyone’s priority.