Inventory Management

Question 1

What is the role of the operations department?

Answer 1

The role of the operations department is to provide the products that the organisation offers

Question 2

What is the Role of the secondary sector organisation?

Answer 2

Secondary sector organisations will be concerned with actually producing goods from raw materials

Question 3

What is the role of tertiary sector organisations?

Answer 3

Tertiary sector will be concerned with the purchasing and stocking of goods or the systems that are in place to provide services to customers

Question 4

What is inventory management?

Answer 4

Inventory management is concerned with the sourcing and storage of raw materials (for secondary sector businesses) or supplies of finished goods for resale (for tertiary sector businesses)

Question 5

What is the logistical management of inventory?

Answer 5

Logistical management of inventory refers to the process of dealing with an entire order from start to finish

Question 6

What do logistics managers do?

Answer 6

Logistics managers will be responsible for the following processes:

• inventory
• storage and warehousing
• order processing
• distribution

Question 7

Inventory

Answer 7

-liaising with suppliers that provide materials for production, partly or completely finished goods (known as the supply chain)

Question 8

Storage and warehousing

Answer 8

-ensuring the appropriate storage of inventory including sending inventory to production departments if required.

Question 9

Order processing

Answer 9

-dealing with orders from customers to ensure they receive the correct products

Question 10

Distribution

Answer 10

Deciding on the best method of distribution to get the product to the customer

Question 11

What can distribution methods include of:

Answer 11

• road/rail/air/sea etc
• utilities infrastructure
• satellite/cable/mobile networks

Question 12

What must logistics managers also be aware of?

Answer 12

Logistics managers must also be aware of external factors that can affect methods of distribution such as rising fuel costs and environmental pressures such as attempting to reduce their carbon footprint by being more fuel-efficient

Question 13

What happens when a supplier is chosen?

Answer 13

Once a supplier is chosen, the business must then consider the quantity of inventory to be ordered

Question 14

What must a business not do?

Answer 14

A business must not overstock or understock as both have negative consequences

Question 15

What are the consequences of overstocking?

Answer 15

• supplies could go out of date if they are stored for too long
• supplies could go out of fashion before they are used
• too many supplies leaves a risk of theft by staff, customers or thieves
• the business will have to pay for stockholding costs, such as insurance and security
• the opportunity cost of money being tied up in inventory which could be better used elsewhere in the business

Question 16

What are the consequences of understocking?

Answer 16

• the business may run out of inventory and be unable to continue production or carry on selling
• the business will not benefit from bulk buying discounts due to making smaller orders
• there may be no goods to sell, resulting in a bad reputation and customers not returning
• there will be an increase in delivery costs since many smaller deliveries will have to be made
• there will be an increse in administration costs eg paying staff to browse for supplies, complete order forms, settle invoices, etc

Question 17

Features of an inventory management system

Answer 17

• maximum/economic inventory level
• minimum inventory level
• re-order level
• re-order quantity
• lead time
• buffer inventory

Question 18

Maximum/economic inventory level

Answer 18

This is the most amount of inventory that should be held- setting this level avoids consequences of overstocking

Question 19

Minimum inventory level

Answer 19

This is the least amount of inventory that should be held- setting this level avoids consequences of understocking

Question 20

Re-order level

Answer 20

The level at which inventory is re-ordered. Computerised inventory systems link to EPOS and automatically re-order goods. ❌❌EPOS?- this avoids running out of inventory

Question 21

Re-order quantity

Answer 21

This is the amount that is ordered- this ensures the quantity ordered is not too much or too little

Question 22

Lead time

Answer 22

This is the time taken between an order being placed and inventory arriving- as short a lead time as possible allows the business to react to rush orders

Question 23

Buffer inventory

Answer 23

This is the extra inventory below the agreed minimum to be used in emergencies- this ensures that production doesn’t stop and sales continue to be made

Question 24

Each business will have to set their own specific levels, depending on the following factors:

Answer 24

• maximum inventory level
• minimum inventory level
• reorder level

Question 25

Maximum inventory level

Answer 25

The maximum inventory level depends on the storage available, the cost of storing goods and the maximum amount of demand

Question 26

Minimum inventory level

Answer 26

The minimum inventory level depends on the relationship with suppliers, the skill levels of staff so materials are not wasted, the finance available, the minimum amount of demand and the likelihood of drastic changes to tastes and fashions

Question 27

Reorder level

Answer 27

The reorder level depends on the lead time, the amount of inventory already held, if bulk-buying discounts are available, and the maximum and minimum inventory levels themselves

Question 28

What is Just In Time (JIT)?

Answer 28

- Just-In-Time (JIT) is an alternative approach to inventory management - JIT is the process of ordering supplies only when they are either required for production or when an order is placed by a customer

Question 29

Where did JIT originate?

Answer 29

JIT originated in Japan, a country renowned for ‘lean’ production techniques that increase efficiency and reduce wastage

Question 30

Advantages of JIT

Answer 30

- allows production to be lean ie there is no wastage as all inventory is used for production - no money is tied up in inventory, improving cash flow and working capital - no warehouse is required, saving costs - the business is more responsive to changing external factors

Question 31

Disadvantages of JIT

Answer 31

- if deliveries are late then the business will face the negative consequences of understocking - requires excellent relationships with suppliers to work effectively, which can take time to develop - relies on a good infrastructure between the business and suppliers eg roads - no room for error in production

Question 32

Computerised inventory control

Answer 32

Most inventory systems are now computerised

Question 33

What are the advantages of computerised inventory control?

Answer 33

- databases keep balances of inventory which are automatically updated - can be linked to tills through EPOS, which update inventory levels with each sale - accurate and constant monitoring of inventory levels allows for automatic re-ordering - allows for decisions on slow moving inventory or best sellers to be made by managers from their computers - can highlight regional variations in inventory for head office - can highlight seasonal shifts in demand - is a deterrent to theft by staff as they know inventory levels are monitored closely

Question 34

What are the disadvantages of computerised inventory control?

Answer 34

- computerised systems will cost a lot of money to install and maintain - Money and time need to be invested to train staff to operate the system efficiently - crashes and breakdowns can hold up re-orders and production

Question 35

Where is inventory stored?

Answer 35

Inventory is usually stored in warehouses

Question 36

What are features of effective warehousing?

Answer 36

- ground level only - mechanical handling, eg. Forklifts - suitable environmental for products eg refrigerated - large loading bay with easy access - technology utilised to improve speed and accuracy eg barcode scanning, robotics

Question 37

What is centralised storage?

Answer 37

Large buildings in central locations are used to store inventory and distribute raw materials to factories or finished goods to retail outlets

Question 38

What are advantages of centralised storage?

Answer 38

- specialist staff are employed to maintain inventory, which improves speed of inventory handling and security - centralised warehouses can store a massive amount of inventory, benefiting from economics of sale - the same procedures for issuing inventory are used across the organisation, improving consistency - it may be cheaper to store inventory in one large warehouse than the total cost of many smaller on-site storerooms - easier for suppliers to deliver inventory as centralised warehouses are often located close to infrastructure eg motorway networks, docks or air and rail cargo terminals

Question 39

What are the Disadvantages of centralised storage?

Answer 39

- inventory has to be delivered to each division or department, causing delays - specialist staff need to be employed to maintain inventory, increasing wage costs - specialist equipment needs to be purchased and maintained - inventory usage levels and needs are unclear as divisions need to communicate with the warehouse - the use of centralised warehousing has declined due to more efficient inventory systems such as JIT, sourcing direct from the supplier

Question 40

What is decentralised storage?

Answer 40

Warehouses can also be smaller buildings or areas of a factory or retail outlet

Question 41

What are the advantages of decentralised storage?

Answer 41

- inventory is always close at hand when needed for production or sell to customers - smaller, more local warehouses are more responsive to local needs - inventory usage reflects production as it is stored in factories or retail outlets - smaller amounts of inventory result is no negative consequences of overstocking

Question 42

What are the disadvantages of decentralised storage?

Answer 42

- can lead to wastage or theft of inventory as security isn’t as goods as it is in centralised storage - lack of specialist staff can lead to inventory control being clumsy and inefficient - each division may handle inventory differently, leading to inconsistency and problems being harder to pinpoint for senior management - smaller amounts of inventory result in negative consequences of understocking

Question 43

What is the role of the logistics manager?

Answer 43

- planning inventory required using production and sales budgets - organising for the resources needed for logistics, including warehouse equipment and staff - commanding warehouse staff to carry out tasks - co-ordinating the supply chain, channels and methods of distribution so deliveries are made on time - controlling the quality, quantity, cost and efficiency of the movement and storage of inventory etc - delegating inventory procedures to decentralised warehouses - motivating other members of their team