Chapter 4 Materials

Question 1

What is a Fixed Quantity System?

Answer 1

When a company place a order of the same amount when reach a certain amount of stock.

Question 2

What is a Buffer Inventory?

Answer 2

The minimum level of inventory to be held.

Buffer Inventory = re-order level - (average usage x average lead time)

Question 3

What is a Periodic (Cyclical) review system?

Answer 3

When inventory is reviewed at fixed points in time (such as every Monday or the 1st of every month) and then the quantity that needs to be ordered is decided.

Question 4

What is maximum Inventory level?

Answer 4

It is the most amount of stocked that can be held at once and is usually determined by the size of the warehouse.

Maximum Inventory Level = Buffer Inventory + Maximum Re-order Quantity

Question 5

What is a Re-order Level?

Answer 5

The level of inventory that will trigger an order to take place.

Re-order Level = (Average use X Average lead time) + Buffer Inventory

Question 6

What is the Maximum Re-order quantity?

Answer 6

Maximum Re-order quantity = Maximum Inventory Level - Buffer Inventory

Question 7

What is the Minimum Re-order quantity?

Answer 7

Minimum Re-order quantity = Average Usage X Average Lead Time

This should be enough stock that when the order is received it should put you back at your re-order level and you will immediately re-order more stock.

Question 8

What are Holding Costs?

Answer 8

Costs that are occurred by holding stock. These could be:

• Opportunity Costs (The money invested in stock could have been used elsewhere)
• Insurance Costs ( To insure the stock)
• Deterioration (Stock can loose quality the longer it is held eg. food has worse date, tech can become less modern, clothes can be come less in demand due to changes in fashion)
• Obsolesce (Stock good perish or be broken)
• Stores Labour Costs (labour costs to look after or protect the stock)

Question 9

What are Ordering Costs?

Answer 9

Cost incurred by ordering inventory such as admin costs and delivery costs.

Question 10

What are stock out costs?

Answer 10

Costs that are incurred by not having sufficient inventory. These could be:

• Reputational damage (not being able to provided for the customer)
• Lost sales (don’t have things to sell, miss out on sales)
• Production Stoppages ( Cannot produce more products without the stock. This waste labour cost who cannot work as not materials, also means cant make goods)
• Emergency Orders ( May have to be increased amounts to order stock quickly like premium delivery fees or using a more expensive supplier who can deliver quicker)

Question 11

What is Economic Order Quantity (EOQ)?

Answer 11

This is the order size that minimizes total costs of holding and ordering inventory.

EOQ = Square Root of [ (2 X Ordering Cost X Demand) / (Holding Costs) ]