Ch 24 Inventory management

Question 1

Define stock/inventory

Answer 1

Materials and goods required to allow for the production and supply of products to the customer

Question 2

What are the 3 elements of stock/inventory?

Answer 2

• Raw materials: purchased from outside supplier, held in stock so that firm can use it at any time to meet increase demand
• Work in progress: main form of stocks held. Value of stocks depend on the length of time needed to complete + method of production
• Finished product: displayed to potential customers and held to cope with sudden increases in demand

Question 3

Why do stocks need to be managed?

Answer 3

• Insufficient stocks to meet unforeseen changes in demand
• Stock wastage might occur due to mishandling or incorrect storage conditions
• Very high stock levels raise stock holding costs
• Poor management leads to late deliveries, low discounts

Question 4

What are the stock-holding costs for high stock?

Answer 4

• Opportunity costs: working capital tied up in stock could be put to another use
• Storage costs: stocks have to be held in secure warehouses. Often require special conditions => special equipment. Staff will needed to guard and transport stocks. Insurance of stocks
• Risk of wastage and obsolescence: if stocks are not used/ sold as rapidly as expected => risks of goods deteriorating or becoming outdated

Question 5

Costs of not holding enough stocks

Answer 5

• Lost of sales: unable to supply customers from stock => lost orders
• Idle production resources: if stocks of raw materials and components run out, production will have to stop => labour and equipment are idle
• Small order quantities: low stock levels => only ordering goods and supplies in small quantities => lose out bulk discounts and transport costs could be higher

Question 6

Define economic order quantity

Answer 6

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

Question 7

Define buffer stocks

Answer 7

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. The less reliable suppliers are, the greater the buffer stock level might have to be

Question 8

Define maximum stock level

Answer 8

The highest capacity of inventory the factory can hold. Limited by space or financial costs of holding higher stock levels

Question 9

Define re-order quantity

Answer 9

The number of units ordered each time. Influenced by the economic order quantity

Question 10

Define lead time

Answer 10

The normal time taken between ordering new stocks and their delivery. The longer the lead time, the higher the re-order stock level will be

Question 11

Define re-order stock level

Answer 11

Level of stocks that will trigger a new order to be sent to supplier

Question 12

Define just-in-time

Answer 12

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 13

Requirements for JIT principles to be applied

Answer 13

• Relationships with the suppliers have to be excellent
• Production staff must be multi-skilled and flexible
• Equipment and machinery must be flexible/ latest IT equipment
• Accurate demand forecasts
• Quality must be everyone’s priority

Question 14

Advantages of JIT

Answer 14

• Capital invested in inventory is reduced and the opportunity costs of stock holding is reduced
• Costs of storage and stock holding are reduced. Space can be used for a more productive purpose
• Much less chance of stock becoming outdated or obsolescent or of wastage and damage
• Quicker response time to changes in consumer demand or tastes

Question 15

Disadvantages of JIT

Answer 15

• Any failure to receive supplies of materials/ components will lead to expensive production delays
• Delivery costs will increase as frequent small deliveries are essential feature of JIT
• Order administration costs may rise because so many small orders need to be processed