Managing stock: Inventory management

Question 1

Inventory management

Answer 1

• Stored accumulation of material resources
• Can be found at different stages of the operation
• Inventory represents an investment of resources and until they’re sold, can be considered costs

Inventory compensates for the differences in timing between supply and demand

Inventory management system defines the policies and procedures that monitor levels of inventory

Question 2

Inventory Profile

Answer 2

• Inventory profile is a visual representation of the inventory level over time
• Every time an order is placed, Q items are ordered
• Demand is stable and perfectly predictable
• Average inventory = Q/2

Question 3

Inventory by location

Answer 3

Suppliers —————Operation —————— Customers

Raw materials ——-WIP——–finished goods

Question 4

Single stage inventory

Answer 4

Suppliers - Stock - Sales Operation

Question 5

Two stage inventory

Answer 5

Suppliers - Depot - Distribution - Local Depot - Sales operation

Question 6

Multi Stage inventory

Answer 6

Suppliers - Input stock - Stage 1 - WIP - Stage 2 - WIP - Stage 3 - Finished good

Question 7

Multi echelon inventory

Answer 7

EG

Yarn producers - Cloth manufactures - Garment manufacturers - Regional warehouses - Retail stores

Question 8

Cycle inventory

Answer 8

• Cycle inventory occurs as a by-product of ordering material
• The longer the time between orders - the larger the order has to be - the higher the cycle inventory will be

Question 9

Safety stock

Answer 9

• Excess inventory that a process holds to guard against uncertainty in; demand, lead time
• Reduce the risk of stock-outs and improve customer service

Question 10

Anticipation Inventory

Answer 10

• Stock that is held for future use at a time when demand will exceed capacity
• Commonly used when demand fluctuations are large but predictable
• Zara a good example of minimising the use of anticipation inventory

Question 11

Pipeline Inventory

Answer 11

• Inventory that is in process of moving from one location in the supply chain to another.
• Order that have been placed but not yet received
• Increasingly important due to globalisation

Question 12

Decoupling Inventory

Answer 12

• Gives opportunity for 2 processes to operate relatively independently
• Have enough decoupling inventory between each process

Question 13

Remanufactured/reconditioned Inventory

Answer 13

• Products that have been used by a customer and then re-acquired for remanufacturing to be sold again
• In prominence due to sustainability movement
• Mazuma Mobile

Question 14

Inventory equilibrium: reasons for carrying inventory

Answer 14

• Flexibility in dealing with unexpected demand fluctuations
• Protection from uncertainty in; problems in raw material suppliers
• EOS
• Resource utilisation; maximise the use of our machines and staff, minimise the cost of set-up changes

Question 15

Reasons for reducing inventory

Answer 15

• Storage and handling
• Interest and opportunity cost
• Property tax and insurance
• Shrinkage and spoilage

Question 16

Continuous review system

Answer 16

• Inventory level always under observation
• When inventory drops below certain level an order is placed
• Size of the order will be in line with optimal order quantity EOQ

Question 17

Periodic review system

Answer 17

• Inventory levels checked at a fixed time interval

- Whatever level the inventory is at during the inspection, it is topped up to a specified level

Question 18

Calculating the optimal order quantity EOQ

Answer 18

• Economic order quantity will tell us how much we should be ordering as to minimise inventory costs; given our demand
• EOQ provides the optimal trade off between ordering costs and holding costs
• Annual holding costs rises as order quantity increases but annual ordering costs fall

EOQ derivation
Annual holding costs = Q/2 x H
Annual holding costs = D/Q x S
Total costs = {(Q/2) x H} + {(D/Q) x S}

Q=order q
D = demand
S = order processing costs
H = Holding costs per unit

TC is minimised where Q* = EOQ

Q* = Square root of (2DS)/H

Question 19

Periodic review

Answer 19

• P-systems have a fixed time period but the order quantity can vary substantially order-to-order
• Reorder period usually based on convenience and/or using EOQ
• Once the reorder period has been calculated, the target inventory level which is the desired quantity of inventory that will cover expected demand can also be deduced

Question 20

ABC inventory categorisation

Answer 20

Inventory systems according to value

Usage value = Usage (items/year) x cost (£/item)