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Flashcards in 4.22 Inventory management Deck (15)
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- The raw materials, work in progress and finished goods held by a business to enable demand to be met


Why businesses hold stock?

1. Raw materials and components
2. Work in progress
3. Finished goods


Stock-holding costs

1. Opportunity cost: Working capital tied up in stocks could be put to another use
2. Storage costs
3. Risk of wastage and obsolescence


Costs of not holding enough stocks

1. Lost sales
2. Idle production resources: Stocks of raw materials and components run out, production will have o stop
3. Special orders could be expensive: Out of stock -> place urgent order -> expensive than normal ones
4. Small order quantities: Low stock level usually means small quantities orders -> lose out bulk discounts


Economic order quantity

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


Buffer stocks

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


Re-order quantity

The number of units ordered each time


Lead time

The normal time taken between ordering new stocks and their delivery


Just-in-time stock control

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


How to achieve JIT

1. Relationships with suppliers have to be excellent
2. Production staff must be multi-skilled and prepared to change jobs at short notice
3. Equipment and machinery must be flexible
4. Accurate demand forecasts
5. Lastest IT equipment
6. Excellent employee-employer relationship
7. Quality must be everyone's priority


Ads of JIT

+ Capital investment inventory is reduced
+ Less opportunity of holding cost
+ Less chance of stock becoming outdated to obsolescent.
+ Less damage, wastage
+ Greater flexibility that the system demands leads to quicker response times to changes in consumer demand or tastes
+ Multi-skilled and adaptable staff required to JIT may gain from improved motivation


Disads of JIT

- Delivery costs increase bc small orders is one feature of JIT
- Order-administration costs may rise
- Reduction in bulk discounts


Not hold stock effectively (ms)

– out of date stocks may be held if an effective stock rotation system is not used
– stock wastage may occur with inefficient inventory storage system
– inventory might be too high – high storage costs and opportunity cost of capital tied up
– Late deliveries


JIT evaluation

JIT may not be suitable at all times:
+ Expensive IT systems needed to operate JIT effectively
+ Rising global inflation makes holding stocks of raw materials more beneficial bc its cheaper to buy in large quantity


Benefits of holding inventory

- Ability to meet demand
- Ensuring production is not interrupted
- Gaining a discount
- Reducing inflation effects