Inventory Management Flashcards
What does inventory/stock include?
This includes raw materials, work in progress (partly finished goods) and finished goods
What are the pros of holding inventory?
If demand increases, they are ready for this
Economies of scale – bulk purchased discount
Immediate delivery can follow all sales if finish goods are held
Secure suppliers (in case supplier is unreliable)
What are disadvantages of holding inventory?
Cost of storage
Perishable items – if demand doesn’t increase it leads to higher waste
Insurance security checking and handling costs
Risk of deterioration
Risk of stock being obsolete
Opportunity cost because the money could’ve been used elsewhere. Cash used to purchase/make stock and store it.
What are the factors influencing in inventory levels?
Lead time: long lead time equals higher buffer stock level
cost of holding inventory
finance available
discount for bulk buying me outweigh cost of storage
type of inventory – can’t store perishable goods
season: may need to stock pile prior to peak season
unforeseen circumstances
What are the costs of holding inventory and explain them ?
Costs of storage-more inventories require large storage space and possibly extra employees and equipment to control and handle them
Interest costs - holding inventories means thing up capital on which the business may be paying interest
Obsolescence costs - the longer inventories are held the greater the risk they will become obsolete
Stock out costs - this happens if a business runs out of inventory which can result in:
lost sales and customer goodwill
cost of production stoppages or delays
Extra costs of urgent replacement orders
What are the costs of holding inventory and explain them?
When can stock out costs be significant?
Stock-‐out costs can be particularly significant as it results in lost sales that may instead go to a competitor as well as the potential loss of customer goodwill cost will and loyalty
What is the overall objective of inventory?
Maintain inventory levels so total costs of holding inventories is minimised .
Describe rhe maximum level on an inventory control chart
Max level of inventory a business can or wants to hold
Describe the re order level on the inventory control chart
Acts as a trigger point so that when inventory falls to this level the next supplier order should be placed
Describe lead time in the inventory control chart
Amount of time between placing the order and receiving inventory
What is the minimum inventory level on the inventory control chart?
Min amount of product that the business would want to bikes until stock. Assuming the minimum stock level is more than zero this is known as buffer stock
Describe buffer stock in inventory control chart
An amount of inventory held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliees
What are factors to consider when decided how much inventory to re order
Lead time from supplier
- higher lead times may require a higher re order level
Implications of running out (stock outs)
- if stock outs are very damaging then have a high re order level and quantity
Demand for the product
- higher demand means higher re order levels Normally
What are the effects of low inventory levels?
Lower inventory holding costs eg storage
Lower risk of inventory obsolescence
Less capital tied up in working capital -can be used elsewhere in the business
Consistent with operating lean
What are the effects of a high inventory level ?
Production fully supplied - no delays
Potential for lower unit costs by ordering in bulk/higher quantities
Better able to handle unexpected changed in demand or need for higher output
Less likelihood of stock outs
