Week 1 - Operations And Inventory Flashcards
What is inventory?
Is the stored accumulation of material resources in a system
Why does inventory occur?
When demand and supply are not synchronised
What do complex processes suffer from? (4)
• Transportation delays
• Limitations in production processes
• Uncertainties in customer demand
• Range of different supplier capabilities
Example of a complex process
What is the typical inventory carrying cost percentage per year?
Around 40%
Examples of inventory carrying costs (7)
• Cost of capital / labour
• Ageing - damaged quality over time e.g dirty or unusable
• Warehouse cost
• Pilferage/shrinkage - inventory being stolen
• Tax & Insurance
• Materials handling - movement of inventory using machinery
• Obsolescence - process of becoming outdated and no longer used
What are the benefits of inventory? (2)
• It provides some security against uncertain supply and demand
• It allows for the separation of successive operations with different throughput rates
Implications of excessive inventory (3)
• It is costly tying up working capital
• It takes up valuable space incurring storage costs
• Inventory is at risk of deterioration, obsolescence, pilferage etc.
Name different forms of inventory (10)
• Small tools - items used in manufacturing
• Spares - kept for repair purposes
• Waste - may have value such as scrap metal
• Finished goods
• Work in process
• Goods in transit
• Consumables - oil, cleaning fluid, stationery etc
• Raw materials
• Purchased parts
• Packaging
Why would you have raw materials in inventory? (7)
• Attractive exchange rates (more cost effective)
• Reduced unit warehouse costs (supplier discounts due to economies of scale)
• Reduced unit freight cost (less shipments made due to larger shipments saving on transportation costs)
• Units cannot be supplied on demand
• Anticipated price rises
• Supplier discounts
• Uncertain lead times
Why would you have work in process (wip) in inventory? (3)
• Production rates uneven
• Poor layout/large distance between processes
• Enables operations to be disconnected (for maintenance, strikes etc)
Why would you hold finished goods in inventory? (4)
• Display of products
• Exchange policy
• More economic that back ordering (cost savings, back ordering can lead to dissatisfied customers due to lead times in delivery or production)
• Variation in customer demand
Why is it better to hold raw materials that finished goods in inventory? (4)
• Raw materials generally have a longer shelf life
• Higher volumetric storage deterioration (store large quantities at lower cost)
• Lower obsolescence cost due to wider application
• Stock cover lower as its quicker to find alternative supply
Explain the component flexibility funnel
The further along the production line the fewer opportunities exist for putting the item into alternative consumer offerings
What is the two-way categorising of inventory?
• Dependant demand inventory
• Independent demand inventory
What is independent demand inventory? (3)
• Includes items that are not dependant upon the demand of other items
• Tend to be more finished products destined for final consumers
• Demand for this inventory is solely on the requirements of the customer
What is dependant demand inventory? (2)
• Includes items that are usually assemblies or parts used in manufacture of the final products
• Quantity depends on demand for the subsequent part in the system
What is the difference between the way dependant and independent demand inventory is managed? (2)
• Dependant - managed using software integrating operations with purchasing
• Independent - via accurate forecasting and reduction of uncertainty
Four-way categorising of inventory
• Buffer inventory / safety stock
• Cycle/batch inventory
• Anticipation (seasonal) inventory
• Pipeline inventory
What is buffer inventory/safety stock? (2)
• Compensates for the uncertainties inherent in supply and demand
• Aims to avoid stock outs referred to as “just in case” stock
What is cycle/batch inventory?
Occurs because one or more stages in a process cannot supply all the items it produces simultaneously
What is anticipation (seasonal) inventory? (2)
• Compensates for differences in timing of supply and demand (also known as hedging inventory)
• E.g Seasonal food like Easter eggs or Christmas decorations
What is pipeline inventory? (2)
• Materials cannot be transported instantaneously between the point of supply and point of demand
• From the time supplier allocates stock in warehouse to the time it becomes available to the retailer the inventory is “in the pipeline”
How should buffer inventory be approached? (2)
• Find ways to forecast more accurately
• Find ways of reducing uncertainty in supply and demand
How should cycle inventory be approached?
Identify ways of improving production process e.g potentially making smaller batches of products more frequently
How should anticipation inventory be approached
Find ways of passing necessary inventory (or capacity) onto customers or suppliers
How should pipeline inventory be approached? (2)
• Identifying any faster modes of transportation
• Potentially changing our location or suppliers location
Compare air and surface transport (2)
• 99.5% of goods are transported by surface modes of transport
• 34.6% of the value of global trade is by air transport
Explain the stock-take process
Involves counting each item in stock and multiplying it by its value (which is usually the cost of purchasing the item - the depreciation figure) summing up the individual items stored
What should you consider when comparing the value of inventories between two different companies? + example
• Must be between two similar companies as value could be relatively small compared to cost of total inputs or it could be too high, especially where storage is the prime purpose
• E.g A hotel will have relatively small inventories in relation to the labour, building and running costs but a jewellers will have a very high value inventory compared to running costs
Two ways of measuring inventory
• Stock cover
• Stock turn
What is stock cover? + formula
• Is the amount of time the inventory would last it it were not replenished
• Stock cover = stock/demand
What is stock turn? + formula
• Is how often the stock is used up in a given period
• Stock turn = demand/stock
What are the three Inventory turnover formulas?
