Topic 17 - Inventory Management

Question 1

Inventory Control System

Answer 1

• Maximum Inventory Level - the most amount of inventory that should be held
• Minimum Inventory Level - the least amount of inventory that should be held
• Reorder Level - the level at which inventory is reordered
• Reorder Quantity - the amount of inventory that is reordered
• Lead Time - the time taken between an order being placed and inventory arriving
• Buffer Inventory - the extra inventory below the minimum that is used for emergencies

Question 2

Just in Time

Answer 2

Ordering supplies only when they are required for production.

Advantages:
- All inventory is used in production, no waste
- No money is tied up in inventory, improving cash flow
- No warehouse is required, saving costs
- Responsive to changing external factors

Disadvantages:
- If deliveries are late production may have to stop
- Requires excellent relationships with suppliers which are time consuming to create
- No room for error in production
- Relies on good infrastructure between the business and suppliers

Question 3

Centralised Storage

Answer 3

Storing inventory in one central location in a large, purpose-built warehouse.

Advantages:
- Specialist staff are employed to maintain inventory which improves speed of inventory handling and security
- Can store a large amount of inventory, benefitting from economies of scale
- The same procedures for issuing inventory are used across the business, improving consistency
- May be cheaper to store inventory in one large warehouse rather than multiple storerooms
- Suppliers are delivering to one location, reducing delivery costs

Disadvantages:
- Inventory has to be delivered to each division or department, causing delays
- Specialist staff have high wage costs
- Specialist equipment is expensive to purchase and maintain
- Not reflective of actual inventory usage in each division or branch
- Storing large amounts of inventory can lead to spoilage and wastage

Question 4

Decentralised Storage

Answer 4

Storing inventory in many locations in smaller warehouses or storerooms.

Advantages:
- Inventory is immediately available in departments, reducing delay
- Smaller amounts of inventory means less wastage and spoilage
- Smaller more local warehouses are more responsive to local needs and changes in the market
- Inventory usage reflects production as it is stored in factories or retail outlets
- Avoids cost of staff to run a warehouse

Disadvantages:
- Can lead to wastage or theft of inventory as security isn’t as good
- Lack of specialist staff can lead to inventory control and handling being clumsy and inefficient
- Increased delivery times as inventory is delivered to multiple locations
- Increased transportation increases carbon footprint
- Each division may handle inventory differently, leading to inconsistency

Question 5

Computerised Inventory Control

Answer 5

Advantages:
- Databases automatically update balances of inventory
- Can be linked to tills through EPOS which update inventory levels with each sales
- Automatically reorders depleted inventory when it reaches the reorder level
- Accurate and constant monitoring of inventory levels
- Allows for decisions on slow moving inventory or best sellers to be made by managers from their computers
- Can highlight seasonal shifts in demand
- Deterrent to theft by staff as they know inventory is monitored closely

Disadvantages:
- Expensive to install and maintain
- Staff need to be trained to operate the system efficiently
- Crashes and breakdowns can hold up reorders and production

Question 6

Logistical Management of Inventory

Answer 6

The process of dealing with an entire order from start to finish.

1) Inventory - liaising with suppliers that provide materials for production, partly or completely finished goods
2) Storage and warehousing - ensuring the appropriate storage of inventory including sending inventory to production departments
3) Order processing - dealing with orders from customers to ensure they receive the correct products
4) Distribution - deciding on the best method of distribution to get the product to the customer

Question 7

Role of the Logistics Managers

Answer 7

1) Planning - inventory required using production and sales budgets
2) Organising - for the resources needed for logistics, including warehouse equipment and staff
3) Commanding - warehouse staff to carry out tasks
4) Coordinating - the supply chain, channels and methods of distribution so deliveries are made on time
5) Controlling - the quality, quantity, cost and efficiency of the movement and storage of inventory
6) Delegating - inventory procedures to decentralised warehouses
7) Motivating - members of their team

Question 8

Overstocking

Answer 8

• Supplies could go out of date
• Supplies could go out of fashion
• Risk of theft
• Money could be tied up in inventory
• High storage costs
• Can meet unexpected orders
• Production can always take place

Question 9

Understocking

Answer 9

• Production may have to stop
• Cannot benefit from bulk buying discounts
• Customers may be put off is there are no goods to sell
• Bad reputation
• May be viewed as unreliable