Inventory Management

Question 1

What is Inventory

Answer 1

Inventory is a physical resource that a firm holds in stock with the
intent of selling it or transforming it into a more valuable state.

Question 2

What are 6 arguments for having inventory

Answer 2

Little’s Law implies:
Ø There is a minimum inventory needed to run the factory
Buffer against uncertainty
Market demand (seasonality, promotions, etc.)
Ø Production throughput (quality, machine breakdown, etc.)
Ø Supply of components
Exploitation of price fluctuations
Ø Raw materials: cocoa, coffee, etc.
Smoothing or levelling of production
Ø Small variation can be buffered through final goodsinventory
Enables the achievement of economies of scale

Question 3

What are the downsides of large and small ordering quantities?

Answer 3

Large- big storage cost

Small- big fixed cost of ordering

Question 4

What is the EOQ

Answer 4

The Economic Order Quantity is the order quantity that minimizes the total cost per period, balancing holding costs with fixed costs of ordering.