O Inventory Management

Question 1

What is the purpose of an inventory management system?

Answer 1

To ensure that stock levels are never too high or too low.

Question 2

Consequences of overstocking

Answer 2

• Too much money is tied up in stock, can’t be invested in other parts of the business
• Bigger chance of theft
• Stock can go out of trend or expire, wasting money
• Can be costly to store

Question 3

Consequences of understocking

Answer 3

• Sudden orders cannot be met
• Can cause a delay or halt in production, causing the company to lose reputation
• Not taking advantage of economies of scale, increasing costs

Question 4

What are the features of an inventory control system?

Answer 4

• Maximum inventory level
• Minimum inventory level
• Re order level
• Re order quantity
• Buffer inventory
• Lead time

Question 5

Describe just in time inventory control

Answer 5

When the organisation holds no stock and relies on their supplier to deliver their raw materials ‘just in time’ after they receive orders.

Question 6

Advantages of just in time inventory control

Answer 6

• Avoids overstocking, no cash is tied up in stock
• Reduces warehousing costs
• Can change with trends very efficiently as they have no out of trend stock to shift
• Creates strong relationship with supplier

Question 7

Disadvantages of just in time inventory control

Answer 7

• If any delay happens for any reason such as bad weather, production will be halted, causing orders to not be fulfilled and a lost reputation
• Relationship with supplier has to be very strong
• Not taking advantage of economies of scale, raw materials and cost of production is more expensive
• Sudden large orders can not be fulfilled, losing out on potential sales

Question 8

Describe centralised warehousing

Answer 8

When all stock is stored in a warehouse in one central location. This stock is then distributed to different departments from that central warehouse.

Question 9

Advantages of centralised warehousing

Answer 9

• Can take advantage of economies of scale
• Easier to manage inventory and deliveries as it is going to one place
• Suppliers are delivery the stock to one location, which reduces delivery costs
• Reduces duplication of stock and administration costs
• Staff become specialised

Question 10

Disadvantages of centralised warehousing

Answer 10

• Specialised staff will require higher salaries, increasing labour costs
• Large warehouses can be very expensive to run (utilities, security, rent)
• Won’t meet the specific needs of each department
• Can take time to transfer stock to different departments when needed, making work less efficient

Question 11

Describe decentralised warehousing

Answer 11

When each department in the organisation is responsible for buying and storing their own inventory in their own smaller warehouses which are within their department

Question 12

Advantages of decentralised warehousing

Answer 12

• All of the department’s specific needs will be met
• Reduces wastage as smaller amounts of stock are being held
• Departments can be more efficient as their stock is very accessible

Question 13

Disadvantages of decentralised warehousing

Answer 13

• Economies of scale is not enjoyed, increasing costs
• Increased delivery costs as small amounts of stock are being delivered to different locations
• Less security and specialised staff, could lead to higher levels of pilfering

Question 14

Describe logistical management of inventory

Answer 14

• The process of dealing with the whole order from start to finish
• Input, process, output

Have to take into account

• Different methods of transportation
• Different channels of distribution
• External PESTEC factors
• Finance available