U4: Inventory Management Flashcards
What does inventory mean?
the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
What are the three main types of inventory?
- Raw materials and components
- Work in progress
- Finished goods
Type of inventory: Raw materials
- bought from suppliers
- used in production process
- e.g. parts for assembly or ingredients
Type of inventory: Work in Progress
- semi or part finished production
- e.g. construction projects
Type of inventory: Finished goods
- completed products ready for sale or distribution
- e.g. products on supermarket shelves; goods in the Amazon warehouse
Key reasons to hold inventory:
- enable production to take place
- satisfy customers demand
- precaution against delays from suppliers
- allow efficient production
- allow for seasonal changes
- provide a buffer between production processes
What are the Main Influenced on Amount of Inventory Held?
• Need to satisfy demand - failure to have goods available for sale is very costly
- demand may be seasonal or unpredictable
• Need to manage working capital - holding inventories ties up cash in working capital
- there is an opportunity cost associated with inventory holding
• Risk of inventory losing value - longer stocks are held, the greater risk that they cannot be used or sold
What does the cost of storage do in relation to inventory?
The Costs of Holding Inventories: Cost of storage - more inventories require large storage space and possibly extra employees and equipment to control and handle them
What does the interest costs do in relation to inventory?
The Costs of Holding Inventories: Interest costs - holding inventories means tying up capital (cash) on which the business may be paying interest
What does the obsolescence risk do in relation to inventory?
The Costs of Holding Inventories: Obsolescence risk - the longer inventories are held, the greater is the risk that they will become obsolete (i.e. unusable or not capable of being sold)
What does the stock out costs do in relation to inventory?
The Costs of Holding Inventories: Stock out costs - a stock out happens if a business runs out of inventory. This can result in: Lost sales & customer goodwill,
Cost of production stoppages or delays, Extra costs of urgent, replacement orders
Why Use Inventory Control Charts?
The overall objective of inventory control is to maintain inventory levels to that the total costs of holding inventories is minimised.
what is the maximum level in an inventory control chart?
Key Parts of an Inventory Control Chart: Maximum level - max level of inventory a business can or wants to hold
Example chart: 800 units
what is the re-order level in an inventory control chart?
Key Parts of an Inventory Control Chart: Re-order level - acts as a trigger point, so that when inventory falls to this level, the next supplier order should be placed Example chart: 400 units
what is the lead time in an inventory control chart?
Key Parts of an Inventory Control Chart: Lead time - amount of time between placing the order and receiving the inventory
Example chart: just under a week
what is the minimum inventory level in an inventory control chart?
Key Parts of an Inventory Control Chart: Minimum inventory level - minimum amount of product the business would want to hold in stock.
Assuming the minimum stock level is more than zero, this is known as buffer stock
what is the buffer stock in an inventory control chart?
Key Parts of an Inventory Control Chart: Buffer stock - an amount of inventory held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers
What are the Factors Affecting When / How Much Inventory to Re-order
• Lead-time from the supplier - How long it takes for the supplier to deliver the order
- Higher lead times may require a higher re-order level
• Implications of running out (stock-outs) - If stock-outs are very damaging, then have a high re-order level & quantity
• Demand for the product - Higher demand normally means higher re-order levels
Advantages of Low Inventory Levels
- Lower inventory holding costs (e.g. storage)
- Lower risk of inventory obsolescence
- Less capital (cash) tied up in working capital - can be used elsewhere in the business
- Consistent with operating “lean”
Advantages of High Inventory Levels
- Production fully supplied - no delays
- Potential for lower unit costs by ordering in bulk / high quantities
- Better able to handle unexpected changes in demand or need for higher output
- Less likelihood of “stock-outs”
What are ways of matching supply to demand?
- use of temporary and part time workers
- produce to order - supply is only triggered by actual demand i.e. as an order is received the products are produced to match the order
- outsource - using services of other organisations to complete all or parts of the manufacturing process
What are Temporary and Part-Time Staff?
- temporary staff are contracted to work for a specific period of time e.g. 3 months
- part time staff are contracted to work less hours than a full time employee e.g. 3 days a week
What are the Benefits of using Temporary and Part-Time Staff?
- flexible force
- better able to match supply (level of output) and demand
- not tied into paying workers when they aren’t being used to their full potential (less costly for the business)
What are the Drawbacks of using Temporary and Part-Time Staff?
- recruitment and training costs may be high and not see as value for money when employees are only with the business for a short period of time
- lack of familiarity with the business may lead to low level of efficiency and productivity
- may be less committed
