Chapter 6: Inventory

Question 1

Explain inventory

Answer 1

Refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit

Question 2

Explain stockholding

Answer 2

It can include small items (bolts) or large items (machines)

Question 3

What is the nature and importance of holding inventory

Answer 3

The unavailability of goods or services is a cause for customer dissatisfaction

Question 4

A manufacturing organization may typically carry some or all of the following inventories

Answer 4

• raw materials and any parts that have been bought in
• work in progress inventory
• finished goods in manufacturing (merchandise in the retail environment)
• replacement parts for machines, tools and other supplies
• inventory in transit between the organization and its customers, this inventory is sometimes known as pipeline inventory

Question 5

Identify the reasons for holding inventory

Answer 5

• take advantage of ordering cycles
• to avoid price increases
• to take advantage of supply discounts if certain order quantities are placed
• there is an insecure supply of raw materials
• to distance an organization from uncertain demand

Question 6

What is the objective function of inventory control

Answer 6

Two types of stockholding are, overstocking(too much inventory) and understocking(too little inventory)

Question 7

Inventory management is concerned with two major areas

Answer 7

1. Satisfaction of customers
2. The costs for managing inventory

Question 8

What are the two areas of inventory management that must be addressed for effective inventory management

Answer 8

1. The timing of placing orders
2. The size of each order stock

Question 9

Customer satisfaction is the most important measurement and can be measured by the following indicators

Answer 9

1. Number of items that are on back order
2. Number of complaints received from a customer
3. Number of times that an organization turns its stock

Question 10

What are the four most common types of inventory (138)

Answer 10

1. Inventory of raw materials
2. Work in progress inventory
3. Maintenance, repair and operating inventory
4. Finished goods inventory

Question 11

True or false
Manufacturers, wholesalers, and retail organizations can use the turnover of inventory to measure the efficiency of their inventory management systems

Answer 11

True

Question 12

True or false
Inventory turnover can be measured by multiplying the cost of goods sold by the value of the average inventory

Answer 12

False. Inventory turnover can be measured by dividing the cost of goods sold by the value of the average inventory

Question 13

Outline the methods utilized to reduce stocks

Answer 13

The lower the inventory in the supply chain the more flexible the chain will become. The methods used to ensure this include:

1. Reduction in line side and stock
2. A two-bin system
3. Supply in line sequencing (SILS)
4. Kanbans
5. Milk runs
6. Supplier sub-assembly of components on the organization’s premises

Question 14

What is the main reason for having inventory

Answer 14

It is to ensure that customer demand can be satisfied the moment demand occurs. It is therefore important that organizations have accurate estimates of the quantity and timing of demand.

Organizations also need to determine the time it will take to deliver and receive orders. This is known as the lead time of an item.

Question 15

What are costs that are incurred when inventory is carried

Answer 15

1. Holding cost
2. Ordering cost
3. Shortage cost

Question 16

Further explain holding cost

Answer 16

It is the cost incurred for the actual storage of the inventory over a specific period.
Cost included here:
- cost of insurance against theft and fire damage
- cost of depreciation of goods held in an inventory
- cost for the interest payable on loans to build the warehouse and stock it
- cost due to newer and better products coming on to the market
- opportunity cost because money is tied up in holding inventory and can, therefore, not be used where it may be needed more urgently (for example expansion because items are in inventory and not being sold)

Question 17

Further explain ordering cost

Answer 17

It is the cost associated with the ordering and receipt of goods, such as supplies, forms and clerical support. When manufacturing of goods takes place, set up costs are incurred for example, all machines must be prepared before any manufacturing can take place.

To minimize ordering costs, an operations manager must ensure that all procedures and processes are functioning efficiently

Question 18

Further explain shortage cost

Answer 18

Also known as stock-out cost is incurred when demand exceeds supply. When a stock-out occurs there is a shortage of the product.

The costs that might be incurred include
- the cost of losing a sale due to the unavailability of the product
- the loss of customer goodwill
- the cost of lost production happens when there is a shortage of an item that an organization uses internally in its manufacturing
- downtime cost because of the lost production