Graphs

Question 1

Optimum order size

Question 2

Inventory control chart

Answer 2

• Buffer inventories:
  The greater the degree of uncertainty about delivery times or production levels, then the higher this buffer level will have to be. Also, the greater the cost involved in shutting production down and restarting, the greater the potential cost savings from holding high buffer levels of inventories.
• Maximum inventory level:
  This may be limited by space or by the financial costs of holding even higher inventories. One way to calculate this maximum level is to add the economic order quantity of each component to the buffer level for that item.
• Re-order quantity:
  This will be influenced by the economic order quantity.
• Lead time:
  The longer this period of time, the higher will be the re-order inventory level. If suppliers are unreliable and the lead time is long, the buffer inventory level will have to be relatively high.
• Re-order level:
  This depends on how long it takes suppliers to deliver new supplies and the rate of usage of inventories. Most businesses use computers to keep a record of every sale and every delivery of stock. The re-order quantity and re-order stock level can be programmed into the computer. It can then re-order automatically from the supplier when inventories fall to the re-order level. The inventory control chart can also be computerised.

Question 3

Importance of supply chain management

Answer 3

Businesses of any size will benefit from reducing the time it takes to convert raw materials into completed products available for sale. Supply chain management aims to reduce this time period by:
* establishing excellent communications with supplier companies, which helps to ensure the right number of goods of the right quality are received exactly when needed
* cutting the time taken to deliver all materials required for production by improving transport systems
* speeding up the new product development process to improve the competitiveness of the business
* speeding up the production process with technology and flexible workforces
* minimising waste at all production stages to cut costs.

Question 4

Benefits of effective supply chain management

Answer 4

Benefits of effective supply chain management
* Improves customer service:
Customers expect products to be delivered quickly and on time. Good supply chain management ensures that customers receive products more quickly and of the appropriate quality. This increases customer satisfaction.
* Reduces operating costs:
Effective supply chain management allows a business to reduce costs. In particular, purchasing costs and inventory costs should fall. Also, production costs are cut as time is saved in converting raw materials into finished products.
* Improves profitability:
By reducing wasted time, improving inventory management and creating a low-cost but efficient supply chain, business profits should increase.

Question 5

Just in time Inventory management
* Advantages

Answer 5

• Capital invested in inventory is reduced and the opportunity cost of inventory holding is reduced.
• Costs of storage and inventory holding are reduced. Space released from holding inventories can be used for a more productive purpose.
• There is much less chance of inventories becoming outdated or obsolete. Fewer goods held in storage also reduces the risk of damage or wastage.
• The greater flexibility needed for JIT leads to
  quicker response times to changes in consumer demand or tastes.
• The multi-skilled and adaptable staff required for JIT to work may gain improved
  motivation.

Answer 6

• Any failure to receive supplies of materials or
  components in time, caused by, for example, a
  strike at the supplier’s factory, transport
  problems or IT failure, will lead to expensive
  production delays.
• Delivery costs will increase as frequent small
  deliveries are an essential feature of JIT.
• Order administration costs may rise because so
  many small orders need to be processed.
• There could be a reduction in the bulk
  discounts offered by suppliers because each
  order is likely to be very small.
• The reputation of the business depends
  significantly on outside factors such as the
  reliability of suppliers and traffic delays.