Inventory Management Flashcards
What two types of inventory can a business have?
Tangible/Physical inventory: Physical assets such as finished products, raw materials, machines etc.
Intangible/Logical : Assets that aren’t physical i.e, information/data, trademarks, software etc.
Give 2 reasons for inventory management
1) Avoid overstocking or shortages:
Overstocking can lead to higher costs and higher chance of spoiled products.
Shortages can lead to lower revenue and losing customers
2) Identify important product: Most companies has either one or a small group of products that sells much better than the rest. Good inventory management helps companies identify their crucial product.
What are holding costs and what are ordering costs? Explain the relationship between them.
Holding costs - Cost related to holding the inventories i.e, rent, insurance etc.
Ordering costs - Costs associated with acquiring inventory i.e, transport costs, taxes etc.
They have an inverse relationship. Ordering less means higher quantities of inventory per order. This means more storage space is needed to hold the inventory, leading to higher holding costs. Conversely, higher holding costs means more inventory can be stored. This means the company can have fewer orders, lowering ordering costs
Higher ordering costs = lower holding costs and vice versa
Give 4 approaches to inventory management.
EOQ (Economic Order Quantity) - Identify the optimal number of orders required so the company can minimize holding costs
MRP (Material Resource Planning) - Software used by companies to manage inventory.
JIT (Just In Time) - More a philosophy than a strict system.
VMI (Vendor Managed inventory) - Outsource inventory management to a third party.
What system is used to classify inventory? How does it work?
The ABC system - Ranks inventory based on the amount of revenue it generates. The most valuable inventory gets the highest holding costs due to safety, quality storage etc.
Rank A is highest priority. Usually 20% of inventory but 80% of company revenue.
Rank B is usually 50% of inventory but 15% of revenue.
Rank C is usually 30% of inventory but 5% of revenue.
