Week 2 - Total Cost Curve And Inventory Profiles

Question 1

What are the four costs associated with inventory

Answer 1

• Unit costs
• Inventory carrying costs
• Inventory ordering costs
• Inventory stockout costs

Question 2

When are stock cover and stock turn values favourable?

Answer 2

When stock turn is high and stock cover is smaller

Question 3

What are unit costs?

Answer 3

Is price for an item charged by a supplier or the cost to the organisation of acquiring one unit of the item

Question 4

How do you find the unit cost? And when can it be difficult to find?

Answer 4

• Found by looking at the invoice but different suppliers of the same product may have varying purchase conditions
• Difficult to find if goods are manufactured internally

Question 5

What are inventory carrying costs? (2)

Answer 5

• Are costs associated with keeping inventory in a storage area
• There are three types: Investment, warehousing and holding costs

Question 6

What are the costs of cash (investment) costs in inventory carrying costs (2)

Answer 6

• Borrowing costs associated with obtaining the funds to purchase the inventory elf interest rates
• Opportunity costs, or financial returns that could be realised from investing in areas other than purchasing inventory

Question 7

What are the warehouse costs in inventory carrying costs (5)

Answer 7

• Rental or purchase of the facility (includes depreciation)
• Property taxes on the facility
• Insurance on the warehouse facility/building for; fire, flood and other hazards
• Utilities, telephones, energy (especially high for refrigeration of perishable goods
• Staffing the warehouse function

Question 8

What are the holding costs/carrying costs in inventory carrying costs (5)

Answer 8

• Insurance on the inventory itself
• Spoilage that might occur with fresh foods or simply ageing or dirtying
• Obsolescence risky in fashion, text books, high tech equipment and new products
• Security costs
• Loss due to fire theft or damage

Question 9

What are inventory ordering costs (2)

Answer 9

• Are those costs associated with procuring the inventory
• Are expressed as cost-per-order or a percentage and do not include the purchase cost of material

Question 10

How might inventory be acquired? (2)

Answer 10

• Externally from other distinct companies within the supply chain
• Internally from other departments/sections within the same company

Question 11

How do you get the Economic order quantity (EOQ)?

Answer 11

When the carrying cost is equal to order cost on a cost-unit graph

Question 12

5 Common ordering costs acquired from ordering external inventory

Answer 12

• Salary of purchasing staff and those involved in proposal analysis, preparing and sending order
• Salary of the accounting staff
• Communications costs including postage, telephone and email
• Expediting the goods if they do not arrive as planned
• Warehouse costs up to receiving, handling, separating lots, classifying and inspection

Question 13

3 Common costs of ordering internal inventory

Answer 13

• Preparation of the production order
• Preparation of the materials, tools and needed labour
• Setup of the machinery

Question 14

How does ordering internal inventory work? (2)

Answer 14

• The inventory might be produced by the same company/group of companies
• Workcentre A might order some assemblies from Workcentre B

Question 15

What are the costs associated with ordering internal inventory? (3)

Answer 15

• Preparation of the production order
• Preparation of the materials, tools and needed labour
• Setup of the machinery

Question 16

How do businesses benefit from producing economically in smaller batches?

Answer 16

• Reduces inventory costs
• Be more responsive/agile

Question 17

How do you find the EOQ on a cost-units graph?

Answer 17

By adding the item, holding and ordering costs together

Question 18

What are the steps in analysing a quantity discount? (4)

Answer 18

• For each discount, calculate Q*
• If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount
• Compute the total costs for each Q* or adjusted value from step 2
• Select the Q* that gives the lowest total cost

Question 19

How can you reduce cycle stock?

Answer 19

By re-ordering stock daily/weekly

Question 20

What is an inventory profile

Answer 20

Is a visual representation of an inventory level over time

Question 21

What is the difference between fixed-order quantity models and fixed order period models? (2)

Answer 21

• Fixed-order quantity is triggered by an event such as running out of stock
• Fixed-time period is time triggered e.g weekly restocking of shelves

Question 22

How is Just-in-time and using a two bin system similar? (3)

Answer 22

• An operator has two bins of WIP to draw his materials from
• When one is empty a materials handler refills and returns it
• In the meantime the operator continues working with the second bin

Question 23

What is a Kanban production control system?

Answer 23

Is a card or other device that communicates demand for work or materials from the preceding station (a two bin system is an example)

Question 24

Example of a fixed order period

Answer 24

A pub where stock levels are taken at the end of each week and the required order quantities placed with the brewery

Question 25

What is required for successful a fixed order system (Order quantity or order period)

Answer 25

High safety stock - to accolade the risk of stockout

Question 26

When should a flexible order period be used?

Answer 26

When order quantity is variable and the order frequency is fixed

Question 27

When should a continuous review be used?

Answer 27

When order quantity is variable and order frequency is variable

Question 28

When should a fixed order quantity be used?

Answer 28

When order quantity is fixed and order frequency is variable

Question 29

Draw an Inventory profile for using fixed order quantities

Answer 29

Question 30

Draw an inventory profile for using a fixed order period

Answer 30