Lec. 8: Inventory Management

Question 1

What is inventory?

Answer 1

Materials held by a firm.

Question 2

What are the 4 types of inventory?

Answer 2

Raw materials
Work in progress
Finished goods
In transit

Question 3

What is the formula for inventory turnover

Answer 3

Cost of all goods sold in a year / value of average inventory held throughout year

Question 4

Explain “delayed product differentiation”

Answer 4

Benefits from the principle of postponement, by having an intermediate product, from which several different final products are made.

Question 5

Explain the benefits of “delayed product differentiation”

Answer 5

Saving inventory holdings and introducing greater flexibility and simplicity in manufacturing.

Question 6

Explain EOQ

Answer 6

EOQ, Economic Order Quantity, balances the tradeoff between the cost of procuring inventory and the cost of holding inventory. Specifically, between order processing costs and holding costs.

Question 7

What is the formula for EOQ

Answer 7

Sqrt(2DS/H)

Question 8

What are the two basic inventory control systems?

Answer 8

Reorder Point (ROP) inventory systems and Period inventory control systems.

Question 9

What is the formula for ROP?

Answer 9

ROP = D * L + SS

Question 10

What are the three important formulas of a periodic inventory system?

Answer 10

T = EOQ/D
M = D * (L + T) + SS
Q = M - I

Question 11

What are the three types of flow and their main characteristics?

Answer 11

1) Base flow - core business products
2) Wave flow - seasonal or fashion
3) Surge flow - fads

Question 12

What is a core benefit of inventory centralization?

Answer 12

While total demand would be larger, demand variations would be smaller, as local fuctuations will even each other out.

Question 13

Explain the concept of “Replacing inventory with information”

Answer 13

Giving access to inventory at different locations through integrated information sharing. This requires sufficient information, and quick delivery between different locations.

Question 14

Explain the “square root rule”

Answer 14

Needed inventory buffer is proportional to the square root of the number of locations. The proportions of the needed inventory buffer at 1l location and 3 locations is sqrt(1) / sqrt(3) = 0,58
This means savings of approximately 42%

Question 15

Name three inventory reduction principles

Answer 15

Pool inventory
Reduce variation
Reduce lead time

Question 16

What are the percentages of ABC classification

Answer 16

A - 80%
B - 15%
C - 5%

Question 17

What are strategic implications of classification A items?

Answer 17

Deserves highest managerial attention and close day-to-day reviews. Frequently review forecasting, demand requirements, order quantities and safety, and perform frquent cycle counts.

Question 18

What are strategic implications of classification B items?

Answer 18

Regular reviews, but less frequently than A

Question 19

What are strategic implications of classification C items?

Answer 19

Should only receive attention if out of order.

Question 20

Explain Just in time inventory systems

Answer 20

JIT is the philosophy of only having a minimal inventory. Thereby having materials arriving “just in time”.

Question 21

What are the 2 main inventory control systems?

Answer 21

• ROP

- Periodic Inventory Control Systems