UNIT 4. Chapter 22: Inventory management

Question 1

Def. Stock (Inventory)

Answer 1

Materials and goods required to allow for the production and supply of products to the customer.

Question 2

What are the three forms of stock held?

Answer 2

• Raw materials and components
• Work in progress: Stock being converted from raw materials to finished goods
• Finished goods

Question 3

Why is stock management crucial?

Answer 3

To avoid:
• Insufficient stock to meet unforeseen changes in demand
• Out of date stock
• Stock wastage from mishandling stock
• Very high stock level which will result in excessive storage cost and high opportunity cost
• Late deliveries and too large or small deliveries

Question 4

What are the stock holding costs?

Answer 4

• Opportunity cost
• Storage costs
• Risk of wastage and obsolescences

Question 5

What are the costs of not holding enough stock

Answer 5

• Lost sales
• Idle production resources
• Special orders could be expensive e.g. urgent orders
• Small order quantities

Question 6

Def. Economic order quantity

Answer 6

The optimum or least-cost quantity of tock to re-order taking into account delivery costs and stock holding costs.

Question 7

What are the variables (and their definitions) for a graphical approach of controlling stock levels? (5)

Answer 7

• Buffer stock: The minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase
• Maximum stock level: Limited by space or by financial costs of holding even higher stock levels.
• Re-order quantity: the number of units ordered each time, influenced by economic order quantity.
• Lead time: The normal time taken between ordering new stocks and their delivery.
• Re-order stock level: Level of stock that will trigger a new oder to be sent to the supplier.
The graph: book pg. 422

Question 8

Def. JIT

Answer 8

Just in time: This stock-control method aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production, and completed products are produced to order.

Question 9

What are the requirement for JIT to work? (7)

Answer 9

• The relationships between suppliers have to be excellent
• Production staff must the multi-skilled and prepared to change jobs at short notices
• Equipment and machinery much be flexible
• Accurate demand forecasts
• The latest IT equipment
• Excellent employee-employer relationship
• Quality must be made everyone’s priority

Question 10

Advantages of JIT (4)

Answer 10

• Capital (for inventory) and opportunity costs, storage costs (from stock holding) are reduced
• Reduced risks of outdated or damaged inventory
• Quicker response time for consumer demands
• Motivation for employees due to range of work

Question 11

Disadvantages of JIT (2)

Answer 11

• Any failures like worker strikes or transport problems may lead to expensive production delays
• Increase in delivery costs due to need to small deliveries (no purchasing economies of scale).

Question 12

What is JIC?

Answer 12

Just in case - holding a lot of inventory in preparation of any malfunctions in the production system.