Inventory Management

Question 1

What is inventory?

Answer 1

The stock of raw materials, work-in-progress, and finished goods that a business organisation holds

Inventory management is crucial for balancing profitability and liquidity.

Question 2

In inventory management, what is the trade-off between profitability and liquidity?

Answer 2

• Incurring costs to enhance cash flow
• Investing in current assets to increase revenues or decrease costs

Decisions about working capital often involve this trade-off.

Question 3

What are the benefits of holding inventory?

Answer 3

• Increased sales
• Increased satisfaction of customer needs
• No production stoppages

Holding inventory can lead to positive business outcomes.

Question 4

What are the drawbacks of holding inventory?

Answer 4

• Reduced profitability
• Less focus on quality processes

High costs associated with holding inventory can impact overall profitability.

Question 5

What does just-in-time (JIT) inventory management aim for?

Answer 5

To carry virtually no inventory

JIT eliminates storage costs and minimizes obsolescence.

Question 6

What conditions are necessary for JIT to work effectively?

Answer 6

• Clear understanding of customer demand patterns
• Reliable suppliers
• Reliable manufacturing processes

These conditions help in minimizing inventory levels.

Question 7

What is Economic Order Quantity (EOQ)?

Answer 7

A mathematical model that calculates the ideal order quantity for minimizing long-run inventory costs

EOQ helps balance ordering and holding costs.

Question 8

What are the two broad categories of costs associated with inventory?

Answer 8

• Holding costs
• Ordering costs

Understanding these costs is essential for effective inventory management.

Question 9

What are holding costs?

Answer 9

Costs associated with holding inventory, such as warehousing, insurance, and obsolescence

Higher inventory levels lead to increased holding costs.

Question 10

What are ordering costs?

Answer 10

Costs associated with placing an order for new units or goods

More orders placed result in higher ordering costs.

Question 11

What is the impact of order quantity on costs?

Answer 11

• Larger order quantities lead to higher holding costs
• Smaller order quantities lead to higher ordering costs

Finding the right order quantity is crucial for cost management.

Question 12

What is the formula for calculating EOQ?

Answer 12

EOQ = √(2CₒD / Cₕ)

Where Cₒ is the ordering cost, D is the annual demand, and Cₕ is the holding cost.

Question 13

What are the critical expected conditions for EOQ to work?

Answer 13

• Evenly spread demand
• Constant supplier lead time
• Constant ordering and holding costs

Variability in these factors may require maintaining buffer stock.

Question 14

What is the total annual cost at EOQ?

Answer 14

Total annual costs = Ordering costs + Holding costs

At EOQ, these costs are minimized.

Question 15

True or false: A company can lower both ordering and holding costs simultaneously.

Answer 15

FALSE

Lowering one type of cost typically results in an increase in the other.

Question 16

What might lead a company to order a quantity higher than EOQ?

Answer 16

A bulk discount offered by the supplier

The discount must outweigh the increased holding costs.

Question 17

What is the cost of placing an order?

Answer 17

$10

This cost is incurred each time an order is placed.

Question 18

What is the cost of holding one unit in inventory for a year?

Answer 18

$2

This cost is associated with storing inventory over time.

Question 19

What is the purchase price of the unit?

Answer 19

$6

This is the cost to buy each unit before any discounts.

Question 20

Calculate the total annual costs using the equation: (10 * 36,000 / 600) + (2 * 600 / 2). What is the result?

Answer 20

$1,200

This represents the initial total annual costs before any discounts or changes in order size.

Question 21

What is the discount percentage offered on the purchase price if the company orders 1,200 units?

Answer 21

1%

This discount applies to the purchase price when ordering in bulk.

Question 22

What is the revised total annual costs when ordering 1,200 units?

Answer 22

$1,500

This represents an increase in inventory costs due to larger order size.

Question 23

What is the increase in inventory costs when ordering 1,200 units compared to the original costs?

Answer 23

$300

This is the difference between the revised total costs and the original costs.

Question 24

What is the purchase price discount calculated as 36,000 x 1% of $6?

Answer 24

$2,160

This discount incentivizes bulk ordering despite increased inventory costs.

Question 25

True or false: The company would be inclined to order in bulk because the benefit of the **purchase price discount** outweighs the additional annual inventory costs.

Answer 25

TRUE ## Footnote The discount of $2,160 is greater than the $300 increase in costs.

Question 26

What are the two possible approaches to **inventory management** discussed?

Answer 26

* EOQ (Economic Order Quantity) * JIT (Just-In-Time) ## Footnote Each approach has its own assumptions and suitability for different business contexts.

Question 27

EOQ is heavily dependent on assumptions about **demand and lead time** that are generally unrealistic. What does JIT require?

Answer 27

* High-quality materials handling * Comprehensive and reliable customer data * Strong relationships with suppliers ## Footnote JIT is suitable for businesses that can meet these criteria.