MMAC Section 2 : Inventory Controls

Question 1

How do you calculate Re-Order Level?

Answer 1

Usage or Lead Time Fluctuates:
Max Usage x Max Lead Time + Buffer (Min Level)

Usage or Lead Time are constant:
Avg. Usage x Avg. Lead Time + Buffer (Min Level)

Question 2

How do you calculate the Buffer (Min Level or Safety Stock)?

Answer 2

Re-Order Level - (Avg. Usage x Avg. Lead Time)

• Avg. Usage = Min Usage + Max Usage /2
• Avg. Lead Time = Min Lead Time + Max Lead Time /2

Question 3

How do you calculate the Maximum Inventory Level?

Answer 3

Re-Order Level + Re-Order Quantity - (Min Usage x Min Lead Time)

Question 4

How do you calculate the Re-Order Quantity?

Answer 4

Maximum Inventory Level - Buffer = Maximum Order Quantity

Re - Order Level - Buffer = Minimum Order Quantity

Question 5

How do you calculate the Economic Order Quantity?

Answer 5

EOQ = SqRt. (2 x Co x D)
Ch

Co = Cost of placing order
D   = Annual Demand x Usage in Units
Ch = Cost of holding one unit for 1 year

Question 6

Just in Time (JIT) Principles?

Answer 6

High Quality - Material & Production system needs to be reliable/ create no waste.

Speed - Production system must be efficient/ Produce goods when ordered, in good time.

Flexibility - production system must be able to cope with demand

Question 7

Benefits of Just In Time (JIT) ?

Answer 7

1. Cash not tied up in inventory
2. Little storage space needed
3. Better quality product
4. Flexible production/ better co-ordination
5. Suppliers supportive/reliable

Question 8

Disadvantages of Just In Time (JIT) ?

Answer 8

1. Requires predictable demand
2. Requires Flexible Workers and Suppliers
3. No Buffer Inventory if things go wrong