Inventory Management

Question 1

What does inventory mean?

Answer 1

the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand

Question 2

What are the three main types of inventory?

Answer 2

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

Question 3

Type of inventory: Raw materials

Answer 3

• bought from suppliers
• used in production process
• e.g. parts for assembly or ingredients

Question 4

Type of inventory: Work in Progress

Answer 4

• semi or part finished production
• e.g. construction projects

Question 5

Type of inventory: Finished goods

Answer 5

• completed products ready for sale or distribution
• e.g. products on supermarket shelves; goods in the Amazon warehouse

Question 6

Key reasons to hold inventory:

Answer 6

• enable production to take place
• satisfy customers demand
• precaution against delays from suppliers
• allow efficient production
• allow for seasonal changes
• provide a buffer between production processes

Question 7

What are the Main Influenced on Amount of Inventory Held?

Answer 7

• Need to satisfy demand - failure to have goods available for sale is very costly
- demand may be seasonal or unpredictable
• Need to manage working capital - holding inventories ties up cash in working capital
- there is an opportunity cost associated with inventory holding
• Risk of inventory losing value - longer stocks are held, the greater risk that they cannot be used or sold