4.22 Inventory management

Question 1

Stock(inventory)

Answer 1

• The raw materials, work in progress and finished goods held by a business to enable demand to be met

Question 2

Why businesses hold stock?

Answer 2

1. Raw materials and components
2. Work in progress
3. Finished goods

Question 3

Stock-holding costs

Answer 3

1. Opportunity cost: Working capital tied up in stocks could be put to another use
2. Storage costs
3. Risk of wastage and obsolescence

Question 4

Costs of not holding enough stocks

Answer 4

1. Lost sales
2. Idle production resources: Stocks of raw materials and components run out, production will have o stop
3. Special orders could be expensive: Out of stock -> place urgent order -> expensive than normal ones
4. Small order quantities: Low stock level usually means small quantities orders -> lose out bulk discounts

Question 5

Economic order quantity

Answer 5

The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs

Question 6

Buffer stocks

Answer 6

The minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase

Question 7

Re-order quantity

Answer 7

The number of units ordered each time

Question 8

Lead time

Answer 8

The normal time taken between ordering new stocks and their delivery

Question 9

Just-in-time stock control

Answer 9

This stock-control method aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production and completed products are produced to order

Question 10

How to achieve JIT

Answer 10

1. Relationships with suppliers have to be excellent
2. Production staff must be multi-skilled and prepared to change jobs at short notice
3. Equipment and machinery must be flexible
4. Accurate demand forecasts
5. Lastest IT equipment
6. Excellent employee-employer relationship
7. Quality must be everyone’s priority

Question 11

Ads of JIT

Answer 11

+ Capital investment inventory is reduced
+ Less opportunity of holding cost
+ Less chance of stock becoming outdated to obsolescent.
+ Less damage, wastage
+ Greater flexibility that the system demands leads to quicker response times to changes in consumer demand or tastes
+ Multi-skilled and adaptable staff required to JIT may gain from improved motivation

Question 12

Disads of JIT

Answer 12

• Delivery costs increase bc small orders is one feature of JIT
• Order-administration costs may rise
• Reduction in bulk discounts

Question 13

Not hold stock effectively (ms)

Answer 13

– out of date stocks may be held if an effective stock rotation system is not used
– stock wastage may occur with inefficient inventory storage system
– inventory might be too high – high storage costs and opportunity cost of capital tied up
– Late deliveries

Question 14

JIT evaluation

Answer 14

JIT may not be suitable at all times:
+ Expensive IT systems needed to operate JIT effectively
+ Rising global inflation makes holding stocks of raw materials more beneficial bc its cheaper to buy in large quantity

Question 15

Benefits of holding inventory

Answer 15

• Ability to meet demand
• Ensuring production is not interrupted
• Gaining a discount
• Reducing inflation effects