Chapter 8 - Working Capital Management - Inventory Control Flashcards Preview

F9 > Chapter 8 - Working Capital Management - Inventory Control > Flashcards

Flashcards in Chapter 8 - Working Capital Management - Inventory Control Deck (8)
Loading flashcards...
0
Q

The challenge

A

The objective of good inventory management is to determine:-

  1. The optimum re-order level - How many items are left in inventory when the next order is placed.
  2. The optimum re-order quantity- How many items should be ordered when the order is placed.

Lead time - The lag between when an order is placed and the item is delivered.

Buffer inventory - The basic level of inventory kept for emergencies. Required because both demand and lead time fluctuate and predictions can only be based on estimates.

1
Q

Costs of high/ low inventory levels

A

Keeping inventory levels high is expensive:-

  1. Purchase costs.
  2. Holding costs e.g. Storage, stores administration, risk of theft/ damage.

If inventory levels are too low, the business faces alternative problems:-

  1. Stockouts e.g. Lost contribution, production stoppages, emergency orders.
  2. High re-order/ setup costs.
  3. Lost quantity discounts.
2
Q

Dealing with quantity discounts

A

Discounts may be offered for ordering in large quantities. If the EOQ is smaller than the order size needed for a discount, should the order size be increased above the EOQ?

Step 1: Calculate the EOQ, ignoring discounts.

Step 2: if the EOQ is below the quantity qualifying for a discount, calculate the total annual inventory cost arising from using the EOQ.

Step 3: Recalculate total annual inventory cost using the order size required to just obtain each discount.

Step 4: Compare the cost of Steps 2 and 3 with the saving from the discount, and select the minimum cost alternative.

Step 5: Repeat for all discount levels.

3
Q

Bin Systems

A

Two-bin system: Suppose there are bins A and B

  1. Inventory is taken from A until it is empty.
  2. An order for a fixed quantity is placed and in the meantime, inventory is used from B.
  3. The standard inventory for B is the expected demand in the lead time plus some buffer inventory.
  4. When the new order arrives, B is filled up to its standard level and the rest is placed in A.
  5. Inventory is then drawn from A and the process is repeated.

One-bin system:

  1. The same approach is used for a single bin with a red line within the bin indicating the ROL.
  2. These methods rely on accurate estimates of lead time and demand in lead time.
  3. Action must be taken if inventory levels either fall or exceed a preset minimum.

Control levels:
1. Minimum inventory level usually corresponds with buffer inventory.
If inventory falls below that level, emergency action to replenish may be required.
2. Maximum inventory level would represent the normal peak holding (buffer inventory plus the re-order quantity).
If the maximum is exceeded, a review of estimated demand in the lead time is needed.
3. The levels would also be modified according to the relative importance/ cost of a particular inventory item.

4
Q

Periodic review system

A
  1. Inventory levels are reviewed at fixed intervals.
  2. The inventory in hand is then made up to a predetermined level which takes account of likely demand before the next review and during the lead time.
5
Q

Slow moving inventory

A
  1. Management need to review inventory usage to identify slow moving inventory.
  2. An aged inventory analysis should be produced and reviewed regularly for e.g.
    - Elimination of obsolete items.
    - Slow moving inventory items only ordered when actually needed.
    - Review of demand level estimates on which re-order decisions are based.
  3. A regular report of slow moving items is useful for management.
    Arrangement may then be made to reduce or eliminate inventory levels or for disposal.
6
Q

Just in Time (JIT) systems

A
  1. JIT aims to minimise inventory levels and improve customer service by manufacturing not only at the exact time customers require, but also in the exact quantities they need and at competitive prices.
  2. In JIT systems, the balancing act is dispensed with. Inventory is reduced to an absolute minimum or eliminated altogether.

Aims of JIT are:

  • A smooth flow of work through the manufacturing plant.
  • A flexible production process which is responsive to the customer’s requirements.
  • Reduction in capital tied up in inventory.
  1. This involves the elimination of all activities performed that do not add value = waste.
7
Q

Advantages and disadvantages of JIT

A

Advantages:-

  1. Minimises or eliminates stock, defect and production delays. This is achieved by improved workflow planning, an emphasis on quality control and firm contracts between buyer and supplier.
  2. Stronger relationship between buyer and supplier. Buyer benefits from lower inventory holding costs, lower investment in inventory and work in progress, and the transfer of inventory management problems to the supplier.
  3. Reduces scrap, reworking and set up costs while improved production design can reduce or even eliminate unnecessary material movements.

Disadvantages:-

  1. May be little room for manoeuvre in the event of unforeseen delays.
  2. Dependant on the supplier for maintaining the quality of delivered materials and components.