inventory management Flashcards
what happens if a business overstocks?
(two advantages, three disadvantages)
- Having too much inventory is better than having no inventory, as this would prevent any production.
- Overstocking has the benefit that it allows a business to meet any unexpected orders.
- Money tied up in high inventory levels could be invested elsewhere in a business.
- Inventory can go out of fashion or spoil meaning the business will have to write it off as a loss.
- Having too much inventory results in high storage costs in terms of both overheads and security.
what happens if a business understocks?
(five disadvantages)
- Production may stop due to the lack of available materials.
- Sales fall or stop completely leading to cash flow problems for the business.
- Customers who don’t receive their orders on time will be dissatisfied.
- The business cannot fulfil orders on time so will be viewed as unreliable.
- The reputation will be damaged and customers might go to competitors
what is a just in time inventory control system?
(JIT) inventory control system means a business holds no inventory and only receives raw materials and components when they are required for production
what are five benefits of JIT?
- Lower storage costs since finance is not tied up in inventory.
- May lower rent/premises costs since less physical storage space is required.
- Working capital may be better used elsewhere in the business and protects cash flow.
- Reduced wastage as less inventory is stored.
- Reduced risk from perishables spoiling or going past sell by date
what are five disadvantages of JIT?
- Relies on good communication/relationships with suppliers to work effectively.
- If inventory does not arrive then there will be delays and production may halt completely.
- If production halts the business is paying for workers who aren’t producing goods.
- Production delays leads to loss of sales and potential cash flow problems.
- May lose out on economies of scale/buying in bulk
what is centralised inventory storage?
the inventory of the business is stored in a single location, such as a warehouse, rather than in different departments or multiple locations
what are four advantages of centralised inventory storage?
- Inventory may be ordered in bulk leading to economies of scale and reduced unit costs.
- Suppliers are delivering to one location, so reduced delivery costs.
- No space is taken up in departments with storage
- A centralised warehouse can be cheaper than using multiple warehouses
what are four disadvantages of centralised inventory storage?
- Additional staff to operate the warehouse increases costs.
- Cost of specialist equipment and storage facilities.
- Not reflective of actual inventory usage in each division/branch.
- Storing large amounts of inventory can lead to spoilage and wastage
what is decentralised inventory storage?
each department in the organisation is responsible for ordering and storing its own stock
what are four advantages of decentralised inventory storage?
- Inventory is immediately available in departments, so there is no delay in receiving goods.
- Smaller amounts of inventory being held means less wastage and spoilage.
- Departments are more responsive to local needs and changes in the market.
- Avoids costs of staff required to run a warehouse
what are four disadvantages of decentralised inventory storage?
- Increased delivery times due to low amounts being delivered to multiple locations.
- Increased transportation/delivery increased the carbon footprint of the business.
- Less specialist handling of stocks so lower efficiency in inventory handling and processing.
- May be less security in departments so greater chance of theft of inventory
