L4M7- Chapter 2- Understand the key elements of effective inventory control Flashcards
What is the difference between opening stock and closing stock?
Opening stock is the inventory held at the start of an accounting period whereas the closing stock is what is at the end of the period (and becomes the opening stock of the next period)
What is cycle counting?
A cyclical process of counting inventory to check system to actual balances
What is the difference between surplus stock and dead stock?
Surplus stock is excess stock that is used by an organisation. Dead stock is stuff that will never be used by an organisation
What is the difference between obsolete and redundant stock?
Obsolete: No longer used or heading to a position where there will be no demand at all- Food that has gone out of date for example
Redundant: Superfluous, surplus, unnecessary- example could be getting a new smart phone meaning your old one is no longer useable but still has value
What could cause stock to become obsolete?
Technological change
Cultural change
Legislation
What could cause stock to become redundant?
Poor forecasting
Poor demand
Weak customer relationships (leading to cancellations)
Overstocking
Change in internal policy (e.g. more environmentally friendly)
Too much variety
How can you avoid redundant or obsolete stock?
Good market knowledge
Accurate forecasting
Clear communication
JIT supply chains
Reduced batch production
Good sales and planning teams
Reduced variety
What is the difference between surplus, obsolescent, obsolete and redundant stock?
Surplus= Excess stock over what is required
Obsolescent = in the process of becoming outdated or obsolete
Obsolete= No longer used, outdated
Redundant= surplus or unnecessary, but can be used and there is potential demand, just not in the current form
What is the difference between direct and indirect supplies?
Direct are integrated into the finished product
Indirect are not incorporated into the finished product but keep the business functioning
What is the ABC product classification?
Using the pareto principle to calculate high value/frequency of use of a product to find the percentage of parts that:
A- make up 20% of parts that make 80% of costs
B- the next 30% of products that make up 20% of costs
C- the final 50% of products that make 5% of costs
What is liquidity?
Ultimately, does the organisation have cash resources to pay its liabilities when they are due? (liabilities are short term debts)
What is stock profile?
The description of stock items in terms of value, rate of turnover, storage characteristics etc
What are the 3 summary groups of costs for acquisition? (hint they all begin with P)
Preliminary costs- Actions before raising a PO
Placement costs- Raising the PO and ensuring the supplier receives it
Post placement costs- Costs after the PO has been raised to get the goods to the requester and make payment
Naturally you also have the actual cost of the item you are acquiring.
What is the purpose of a PIMS system? (purchase invoice matching system)
Automatically checking a PO against the delivery note and the supplier invoice
Often used for approval of low value invoices
What are holding/carrying costs?
What are the 2 types of holding cost?
Costs for storage and handling of physical stock
1. Costs related to the value of goods (product cost, insurance, theft)
2. Costs related to the physical characteristics (storage space, power, equipment)
What is a stockout?
What costs are incurred if there are stockouts?
When an inventory item is not available when required.
Can cause costs through:
- Loss of production output as need to focus on the stockout first
- costs of machine downtime
- costs of dealing with the stockout e.g. more expensive from another supplier, urgent delivery costs, switching production or using alternative parts
What is consignment stock?
Used particularly for MRO.
A technique of acquiring stock from a supplier and only paying when used or sold
How would an organisation determine what levels of stock should be held as buffer or safety stock?
This is stock in excess of what is expected to be required and provides a safety margin. The optimal amount requires statistical analysis of orders and lead times.
1) What are the average orders and normal lead times
2) Cost benefit analysis- what is the probability of a stockout occurring, what are the cost implications if it does happen, what are the costs of having a variety of safety stock levels?
3) Once the expected demand inventory falls below the cost line set from a stockout is the reorder point
Effectively a risk analysis- what is the risk, likelihood and severity. What is the cost in mitigation.
What is vendor managed inventory (VMI)?
Inventory owned by the buying organisation that is monitored and managed by the supplier to ensure adequate supply in line with usage and future demand (think about a supplier going to a shop and topping up the stock themselves so the retailer can sell the stock)
What is the difference between subjective and objective forecasting? Give some examples of each
Subjective= qualitative- expert opinion, market research, surveys, structured questioning like delphi method.
Objective= quantitative- hard data, often using what has happened in the past to direct the future forecast. Averages, trends, time series data, graphs
What is the delphi method and when would it be used?
Subjective forecasting tool.
Involved a structured technique using a panel of experts and rounds of questioning. Responses are shared after each round and the experts encouraged to reconsider their own responses (aim to get a consensus view)
What is the difference between independent and dependent demand?
Dependent demand relies directly on another product or the rate of production for its requirement e.g. the number of tyres required is directly dependent on the number of cars ordered
Independent demand is not related to anything e.g. demand for the car itself. This is influenced by market conditions or external factors.
What are the 3 main ways of reordering for independent demand?
When should each method be used?
What are the methods?
1) Fixed quantity- predetermined amount every time
2) Economic order quantity- formula that allows you to calculate the ideal quantity of inventory to order for a given product. Includes demand, ordering costs and holding costs
3) Time or periodic review- uses the ABC classification to review when to replenish stock based on time rather than quantity signals (e.g. A stock is checked daily, B stock checked weekly, C stock checked monthly)
When should they be used?
1) FQ- when stock is used at an inconsistent rate and you require a reliable trigger and consistent lead times
2) EOQ- highly technical and rely on assumptions, so not often used
3) Periodic- good when suppliers have regular delivery intervals
What reorder methods would be used for dependent demand?
MRP, MRPII, ERP or JIT models are used for dependent demand (ie products demand are directly related to production)
What is an MRP system?
MRP is materials requirement planning. Computerised systems for inventory flows and management. It looks at the known demand, the forecast demand, the BOM and the inventory but is focussed on materials, modernisation has developed the systems.
Has been modernised by MRPII= Materials RESOURCE planning
Then modernised by ERP= enterprise resource planning
What is the difference between MRP and MRPII
Materials Requirement Planning
Materials Resource Planning
MRP only looks at the materials that go into the production process
MRPII coordinates data from wider sources including engineering, procurement, marketing, sales, production, inventory, HR and finance.
How is ERP different from MRP and MRPII?
ERP is the latest version of MRP/MRPII. It is a system for business wide coordination planning and execution. It will look at resources required across the whole organisation including teams like HR, IT, procurement, SC, operations, finance etc.
