Managing Inventory in the Supply Chain

Question 1

Define inventory

Answer 1

1) Inventory is an asset on the balance sheet and a variable expense on the income statement.
2) Inventories also have an impact on return on investment (ROI) for the firm.
3) Inventories also have an impact on return on investment (ROI) for an organization.

Question 2

From what sources do cycle stocks rise?

Answer 2

• procurement
• production
• transportation

Question 3

What do you know about safety stocks? (mention demand/supply perspective)

Answer 3

1) All organizations are faced with uncertainty.
2) On the demand side, there is usually uncertainty in how much customers will buy and when they will buy it.
3) On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order.

Question 4

Talk about the Time/In-Transit concept

Answer 4

The time associated with transportation means that even while goods are in motion, an inventory cost is associated with the time period. The longer the time, the higher the cost.

Question 5

Talk about WIP stocks

Answer 5

WIP inventories, associated with manufacturing, can be significant while the length of time the inventory sits in a manufacturing facility waiting and should be carefully evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology.

Question 6

Talk about seasonal stocks

Answer 6

Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both.

Those faced with seasonality issues are constantly challenged when determining how much inventory to accumulate.

Seasonality can impact transportation.

Question 7

Talk about Anticipatory (Speculation) Stocks

Answer 7

A fifth reason to hold inventory arises when an organization anticipates that an unusual event might occur that will negatively impact its source of supply.

Question 8

With what other functional areas does logistics interfere?

Answer 8

1. Finance
2. Marketing
3. Manufacturing

Question 9

What are the 4 components of Inventory Carrying Costs?

Answer 9

1. Capital costs
2. Storage space costs
3. Inventory space costs
4. Inventory risk costs

Question 10

What is capital cost and what are its components?

Answer 10

cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere

hurdle rate

weighted average cost of capital (WACC).

Question 11

Define storage space costs

Answer 11

includes handling costs associated with moving products into and out of inventory, as well as such costs as rent, heat, and light
Can be variable

Question 12

Define Inventory service cost and inventory risk costs

Answer 12

ISC - includes insurance and taxes

IRC - reflects the possibility that inventory value might decline for reasons beyond the firm’s control

Question 13

What are the steps in calculating the carry to cost of a particular item?

Answer 13

1. First, determine the value of the item stored in inventory.
2. Second, determine the cost of each individual carrying cost component to determine the total direct costs consumed by the item while being held in inventory.
3. Third, divide the total costs calculated in Step 2 by the value of the item determined in Step 1.

Question 14

What do ordering costs or setup costs refer to?

Answer 14

refers to the expense of placing an order for additional inventory, not including product cost

Question 15

What is the Order Cost?

Answer 15

Cost of placing order which may have both fixed and variable components

Question 16

What is Setup Costs?

Answer 16

Expenses incurred each time an organization modifies a production or assembly line to produce a different item for inventory

Question 17

What are several consequences of Excepted Stockout Cost?

Answer 17

1. Back order, which results in the vendor incurring incremental variable costs associated with processing and making the extra shipment
2. Customer might decide to purchase a competitor’s product resulting in a direct loss for the supplier.
3. Customer might decide to permanently switch to a competitor’s product with loss of income.

Question 18

What are some elements associated with In-Transit Inventory Carrying Cost?

Answer 18

Owner of product while it is in transit will incur resulting carrying costs.

In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase.

Owner should consider its delivery time part of its inventory carrying cost.

Question 19

how do you Determine the Cost of In-Transit Inventories?

Answer 19

1) The capital cost of carrying inventory in transit generally equals carrying inventory
2) storage space cost not relevant to inventory in transit
3) insurance needs requires special analysis
4) obsolescence or deterioration costs are lesser risks for inventory in transit

Question 20

Whats the difference between the Dependent and the Independent Demand?

Answer 20

“independent” when such demand is unrelated to the demand for other items

“dependent” when it is directly related, or derives from, the demand for another inventory item or product

Question 21

Whats the difference between the Pull and the Push approach?

Answer 21

The “pull” approach relies on customer orders to move product through a logistics system
The “push” approach uses inventory replenishment techniques in anticipation of demand to move products.

Question 22

What are the basic assumptions of the simple EOQ model?

Answer 22

1. A continuous, constant, and known rate of demand
2. A constant and known replenishment or lead time
3. All demand is satisfied
4. A constant price or cost that is independent of the order quantity (i.e., no quantity discounts)
5. No inventory in transit
6. One item of inventory or no interaction between items
7. Infinite planning horizon
8. Unlimited capital

Question 23

What are the 4 major elements in JIT Inventory?

Answer 23

1. zero inventories
2. short, consistent lead times
3. small, frequent replenishment quantities
4. high quality, or zero defects

Question 24

JIT Manufacturing is a philosophy of value-added manufacturing achieved by focusing on what elements?

Answer 24

1) Inventory reduction - exposes problems
2) Kanbans & pull production systems
3) Small lots & quick setups
4) Uniform plant loading
5) Flexible resources
6) Efficient facility layouts

Question 25

What are the benefits of JIT?

Answer 25

1 Reduction in inventories
2 Improved quality 
3 Reduced space requirements
4 Shorter lead times
5 Lower production costs
6 Increased productivity
7 Increased machine utilization
8 Greater flexibility

Question 26

What do you need in order to implement JIT?

Answer 26

1 Starts with a company shared vision of where it is and where it wants to go.
2 Management needs to create the right atmosphere.
3 Implementation needs a designated “Champion”.

Question 27

What is the sequence of 7 steps in implementing JIT?

Answer 27

1 Make quality improvements
2 Reorganize workplace 
3 Reduce setup times
4 Reduce lot sizes & lead times 
5 Implement layout changes 
6 Switch to pull production
7 Develop relationship with suppliers