Inventory Management

Question 1

Identify some measures (averages and ratios) useful in assessing inventory management.

Answer 1

1. Inventory turnover

2. Number of day’ sales in inventory

Question 2

Identify the benefits of a just-in-time inventory system (when compared with a traditional materials-requirement-planning inventory system).

Answer 2

1. Reduced investment in inventory
2. Lower cost of inventory transportation, warehousing, insurance, taxes, and related costs
3. Reduced lead time in acquiring inputs
4. Lower cost of defects
5. Less complex and more relevant accounting and performance measurement

Question 3

Describe the reorder point.

Answer 3

The level of an inventory item on-hand at which that inventory item should be reordered; takes into account:

1. Inventory needed while ordered items are delivered
2. Inventory needed as “safety-stock” –to cover unexpected demand.

Question 4

Identify the central objective of inventory management.

Answer 4

To determine and maintain an optimum investment in all inventories. Under investing in inventory can result in shortages and lost sales; over investing in inventory can result in incurring excessive cost for inventory.

Question 5

Identify the characteristics of a just-in-time inventory system.

Answer 5

1. Demand pull - Goods are produced only when there is an end user demand
2. Excess inventory is minimized
3. Production in work centers that carry out a full set o production processes
4. Relationships with suppliers are close and coordinated
5. Quality standards = Total control of input quality and production process quality
6. Simplified cost accounting is used

Question 6

Identify the characteristics of a traditional materials-requirement-planning inventory system.

Answer 6

1. Supply push - Goods are produced in anticipation of there being a demand for the goods
2. Inventory buffers maintained
3. Long set-up times and long production runs
4. Relationships with suppliers are impersonal; suppliers selected through bidding process
5. Quality standards = Acceptable levels; allows for some defects
6. Traditional cost accounting is used

Question 7

What assumptions are inherent in using the economic order quantity (EQQ) model?

Answer 7

1. Demand is constant during the period
2. Unit cost and carrying cost are constant during the period
3. Delivery is instantaneous

Question 8

Describe the economic order quantity (EOQ).

Answer 8

A model (formula) for determining the size of an inventory order that will minimize total inventory cost, both cost of ordering and cost of carrying inventory; formula uses:

1. Total demand for the inventory item
2. Cost of each order
3. Cost of carrying each unit of inventory