Chapter 6: Inventory

Question 1

Explain inventory

Answer 1

Refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit. Inventory is the largest investment of an organization

Question 2

Explain stockholding

Answer 2

It can include small items (bolts) or large items (machines)

Question 3

What is the nature and importance of holding inventory

Answer 3

The unavailability of goods or services is a cause for customer dissatisfaction

Question 4

A manufacturing organization may typically carry some or all of the following inventories

Answer 4

• raw materials and any parts that have been bought in
• work in progress inventory
• finished goods in manufacturing (merchandise in the retail environment)
• replacement parts for machines, tools and other supplies
• inventory in transit between the organization and its customers, this inventory is sometimes known as pipeline inventory

Question 5

Identify the reasons for holding inventory

Answer 5

• take advantage of ordering cycles
• to avoid price increases
• to take advantage of supply discounts if certain order quantities are placed
• there is an insecure supply of raw materials
• to distance an organization from uncertain demand
• Items are in transit

Question 6

What are the four most common types of inventory (138)

Answer 6

1. Inventory of raw materials
2. Work in progress inventory
3. Maintenance, repair and operating inventory
4. Finished goods inventory

Question 7

Outline the methods utilized to reduce stocks

Answer 7

The lower the inventory in the supply chain the more flexible the chain will become. The methods used to ensure this include:

1. Supplier sub-assembly of components
2. A two-bin system
3. Supply in line sequencing (SILS)
4. Kanbans
5. Milk runs

Question 8

What are costs that are incurred when inventory is carried

Answer 8

1. Holding cost
2. Ordering cost
3. Shortage cost

Question 9

Further explain holding cost

Answer 9

It is the cost incurred for the actual storage of the inventory over a specific period.

Question 10

Further explain ordering cost

Answer 10

It is the cost associated with the ordering and receiving of goods (such as supplies, forms and clerical support). When manufacturing of goods takes place, set up costs are incurred for example, all machines must be prepared before any manufacturing can take place.

To minimize ordering costs, an operations manager must ensure that all procedures and processes are functioning efficiently

Question 11

Further explain shortage cost

Answer 11

Also known as stock-out cost is incurred when demand exceeds supply. When a stock-out occurs there is a shortage of the product.

The costs that might be incurred include
- the cost of losing a sale due to the unavailability of the product
- the loss of customer goodwill
- the cost of lost production (when there is a shortage of an item that an organization uses internally in its manufacturing)
- downtime cost because of the lost production

Question 12

Effective _____ requires organisation’s to set up appropriate inventory control systems.

Answer 12

inventory management

Question 13

What are the costs included in the holding cost

Answer 13

• cost of insurance against theft and fire damage
• cost of depreciation of goods held in an inventory
• cost for the interest payable on loans to build the warehouse and stock it
• cost due to newer and better products coming on to the market
• opportunity cost because money is tied up in holding inventory and can, therefore, not be used where it may be needed more urgently (for example expansion because items are in inventory and not being sold)

Question 14

What are the advantages of holding inventory

Answer 14

• the organization can take advantage of discounts from suppliers on quantities purchased
• unexpected demand can be met
• reduction of setup times can be achieved with sufficient inventory holding, all costs are reduced as a result
• inventory can be utilized to hedge against inflation

Question 15

What are the disadvantages of holding inventory

Answer 15

• inventory hides process problems
• too much inventory hides quality problems
• obsolescence and depreciation cause losses.
• flexibility in the process is jeopardized, new technology cannot be utilized as obsolete inventory must be used before it can be replaced with the latest material