L4M7- Chapter 2- Understand the key elements of effective inventory control

Question 1

What is the difference between opening stock and closing stock?

Answer 1

Opening stock is the inventory held at the start of an accounting period whereas the closing stock is what is at the end of the period (and becomes the opening stock of the next period)

Question 2

What is cycle counting?

Answer 2

A cyclical process of counting inventory to check system to actual balances

Question 3

What is the difference between surplus stock and dead stock?

Answer 3

Surplus stock is excess stock that is used by an organisation. Dead stock is stuff that will never be used by an organisation

Question 4

What is the difference between obsolete and redundant stock?

Answer 4

Obsolete: No longer used or heading to a position where there will be no demand at all- Food that has gone out of date for example

Redundant: Superfluous, surplus, unnecessary- example could be getting a new smart phone meaning your old one is no longer useable but still has value

Question 5

What could cause stock to become obsolete?

Answer 5

Technological change
Cultural change
Legislation

Question 6

What could cause stock to become redundant?

Answer 6

Poor forecasting
Poor demand
Weak customer relationships (leading to cancellations)
Overstocking
Change in internal policy (e.g. more environmentally friendly)
Too much variety

Question 7

How can you avoid redundant or obsolete stock?

Answer 7

Good market knowledge
Accurate forecasting
Clear communication
JIT supply chains
Reduced batch production
Good sales and planning teams
Reduced variety

Question 8

What is the difference between surplus, obsolescent, obsolete and redundant stock?

Answer 8

Surplus= Excess stock over what is required
Obsolescent = in the process of becoming outdated or obsolete
Obsolete= No longer used, outdated
Redundant= surplus or unnecessary, but can be used and there is potential demand, just not in the current form

Question 9

What is the difference between direct and indirect supplies?

Answer 9

Direct are integrated into the finished product
Indirect are not incorporated into the finished product but keep the business functioning

Question 10

What is the ABC product classification?

Answer 10

Using the pareto principle to calculate high value/frequency of use of a product to find the percentage of parts that:
A- make up 20% of parts that make 80% of costs
B- the next 30% of products that make up 20% of costs
C- the final 50% of products that make 5% of costs

Question 11

What is liquidity?

Answer 11

Ultimately, does the organisation have cash resources to pay its liabilities when they are due? (liabilities are short term debts)

Question 11

What is stock profile?

Answer 11

The description of stock items in terms of value, rate of turnover, storage characteristics etc

Question 12

What are the 3 summary groups of costs for acquisition? (hint they all begin with P)

Answer 12

Preliminary costs- Actions before raising a PO
Placement costs- Raising the PO and ensuring the supplier receives it
Post placement costs- Costs after the PO has been raised to get the goods to the requester and make payment

Naturally you also have the actual cost of the item you are acquiring.

Question 13

What is the purpose of a PIMS system? (purchase invoice matching system)

Answer 13

Automatically checking a PO against the delivery note and the supplier invoice
Often used for approval of low value invoices

Question 14

What are holding/carrying costs?
What are the 2 types of holding cost?

Answer 14

Costs for storage and handling of physical stock
1. Costs related to the value of goods (product cost, insurance, theft)
2. Costs related to the physical characteristics (storage space, power, equipment)

Question 15

What is a stockout?
What costs are incurred if there are stockouts?

Answer 15

When an inventory item is not available when required.
Can cause costs through:
- Loss of production output as need to focus on the stockout first
- costs of machine downtime
- costs of dealing with the stockout e.g. more expensive from another supplier, urgent delivery costs, switching production or using alternative parts

Question 16

What is consignment stock?

Answer 16

Used particularly for MRO.
A technique of acquiring stock from a supplier and only paying when used or sold

Question 17

How would an organisation determine what levels of stock should be held as buffer or safety stock?

Answer 17

This is stock in excess of what is expected to be required and provides a safety margin. The optimal amount requires statistical analysis of orders and lead times.

1) What are the average orders and normal lead times
2) Cost benefit analysis- what is the probability of a stockout occurring, what are the cost implications if it does happen, what are the costs of having a variety of safety stock levels?
3) Once the expected demand inventory falls below the cost line set from a stockout is the reorder point

Effectively a risk analysis- what is the risk, likelihood and severity. What is the cost in mitigation.

Question 18

What is vendor managed inventory (VMI)?

Answer 18

Inventory owned by the buying organisation that is monitored and managed by the supplier to ensure adequate supply in line with usage and future demand (think about a supplier going to a shop and topping up the stock themselves so the retailer can sell the stock)

Question 19

What is the difference between subjective and objective forecasting? Give some examples of each

Answer 19

Subjective= qualitative- expert opinion, market research, surveys, structured questioning like delphi method.

Objective= quantitative- hard data, often using what has happened in the past to direct the future forecast. Averages, trends, time series data, graphs

Question 20

What is the delphi method and when would it be used?

Answer 20

Subjective forecasting tool.
Involved a structured technique using a panel of experts and rounds of questioning. Responses are shared after each round and the experts encouraged to reconsider their own responses (aim to get a consensus view)

Question 21

What is the difference between independent and dependent demand?

Answer 21

Dependent demand relies directly on another product or the rate of production for its requirement e.g. the number of tyres required is directly dependent on the number of cars ordered

Independent demand is not related to anything e.g. demand for the car itself. This is influenced by market conditions or external factors.

Question 22

What are the 3 main ways of reordering for independent demand?
When should each method be used?

Answer 22

What are the methods?
1) Fixed quantity- predetermined amount every time

2) Economic order quantity- formula that allows you to calculate the ideal quantity of inventory to order for a given product. Includes demand, ordering costs and holding costs

3) Time or periodic review- uses the ABC classification to review when to replenish stock based on time rather than quantity signals (e.g. A stock is checked daily, B stock checked weekly, C stock checked monthly)

When should they be used?
1) FQ- when stock is used at an inconsistent rate and you require a reliable trigger and consistent lead times
2) EOQ- highly technical and rely on assumptions, so not often used
3) Periodic- good when suppliers have regular delivery intervals

Question 23

What reorder methods would be used for dependent demand?

Answer 23

MRP, MRPII, ERP or JIT models are used for dependent demand (ie products demand are directly related to production)

Question 24

What is an MRP system?

Answer 24

MRP is materials requirement planning. Computerised systems for inventory flows and management. It looks at the known demand, the forecast demand, the BOM and the inventory but is focussed on materials, modernisation has developed the systems. Has been modernised by MRPII= Materials RESOURCE planning Then modernised by ERP= enterprise resource planning

Question 25

What is the difference between MRP and MRPII

Answer 25

Materials Requirement Planning Materials Resource Planning MRP only looks at the materials that go into the production process MRPII coordinates data from wider sources including engineering, procurement, marketing, sales, production, inventory, HR and finance.

Question 26

How is ERP different from MRP and MRPII?

Answer 26

ERP is the latest version of MRP/MRPII. It is a system for business wide coordination planning and execution. It will look at resources required across the whole organisation including teams like HR, IT, procurement, SC, operations, finance etc.

Question 27

What is JIT?

Answer 27

Just In Time It is an inventory control system for producing the right components, in the right quantities, at the time in which they are required.

Question 28

What are the five zeros of eliminating waste? (and part of JIT model)- Acronym DILSH The objective of JIT is 'muda' aka the elimination of waste

Answer 28

Zero defects Zero set up times (or reduced production lines) Zero inventories Zero handling Zero lead times

Question 29

What is Total Quality Management (TQM)?

Answer 29

Organisation wide efforts to improve processes, products and services across all departments

Question 30

What are some advantages and disadvantages of JIT?

Answer 30

Adv: - Low inventory costs - reduced scrap and waste costs - Reduced rework - Reduced back office costs - reduced financial requirements Disadv: - Rigid supply chain - no safety stock - No savings from bulk buying

Question 31

What does the term 'lean' mean in manufacturing?

Answer 31

A management process of reducing waste and thereby creating more value in activities.

Question 32

What types of waste exist? (specifically when thinking about Lean principles)

Answer 32

Transportation- Movement of machinery unnecessarily Inventory- Holding too much stock Movement- moving people or things that do not contribute to production Waiting- idle time Over production- too much Over processing- too many processes Defects- faults Skills- Under utilised talent/knowledge

Question 33

What is six sigma?

Answer 33

A quality management approach that focusses on improving processes, products or services through the identification and elimination of defects

Question 34

What are the 5 principles of Lean?

Answer 34

1. Specify Value- does it meet customer need at the right time 2. Identify the value stream- a set of activities or actions coordinated to deliver the final output 3. Flow- transitions from concept to launch, sale to delivery and raw materials to customers fall dramatically 4. Pull- Customers pull product from suppliers as needed rather than the supplier pushing product into inventory 5. Perfection

Question 35

What is a value stream?

Answer 35

A collection of value bearing activities or actions that are coordinated to deliver the final output

Question 36

What are some of the factors to consider with inventory optimisation?

Answer 36

Inventory optimisation is the management of stock levels to ensure that sufficient inventory is available to meet demand whilst minimising the costs and risk of excess stock. Costs/factors within inventory optimisation: - Storage costs - Insurance costs - Risk of obsolescence or redundancy - Opportunity cost (what did you miss by having cost tied up in capital) - Spoilage cost - Wasted resources

Question 37

What is an evergreen contract?

Answer 37

One that is renewed automatically year to year until cancelled by either party

Question 38

What is the bullwhip effect?

Answer 38

The distorted demand that occurs down a supply chain. Also called the forrester effect. Think about how a small move of the wrist can cause large movement at the other end of the whip

Question 39

What is a master production schedule?

Answer 39

what products a manufacturer will produce, when and in what quantities. An MPS links sales demand with manufacturing capacity. Forms a foundation of MRP systems.

Question 40

An MRP system is an electronic system for combining what?

Answer 40

Known demand Forecast demand inventory BOM This will determine what inventory is required and when, and trigger orders/in house production as necessary.

Question 41

What can MRPII systems do that MRP cannot?

Answer 41

- Builds in resource requirements across teams (e.g. engineering, procurement, finance, HR) - It can run what if analysis (scenarios exploring whether something will happen or not) - Removes silo working as all teams involved are in communication. Both MRP and MRPII only look at the manufacturing element that these teams play in.

Question 42

What is rate of stock turn?

Answer 42

The rate at which inventory stock is sold, used or replaced. It is calculated by dividing the cost of goods by average inventory for the same period. IE sales/ average inventory Appropriate stock turn may vary, in food it needs to be fast, in cars it may be much slower.

Question 43

What is the value stream?

Answer 43

A collection of value bearing activities and actions to deliver the final output. It includes problem solving, information management and physical transformation.

Question 44

How is value stream identified?

Answer 44

Process activity mapping- helps identify unnecessary activities and simplification opportunities. Supply chain response- Reducing lead time and inventory Production variety funnel- inventory reduction and process changes Quality filter mapping- Location of products, service defects, internal scrap and inefficiencies Demand amplification- reduce fluctuations in demand by understanding the supply chain Decision point analysis- when do you stop making things for demand and start making to forecast? Identifies push and pull activities Physical structure- Overviewing the industry and seeing if redesign is required

Question 45

What is net present value?

Answer 45

Gives a future value adjusted for today. Effectively does cash inflow subtracted by cash outflow over a period of time. A discount rate is applied because money now is worth more than money in the future (as money is devalued over time)

Question 46

What is EOQ? How is it calculated?

Answer 46

EOQ is an accounting term. It is a formula that tries to order the optimal amount of inventory to order. It assumes: - Same quantity is ordered at each reorder point - Customer demand is known - Ordering and holding costs are certain - Lead time is known - Cost per unit is fixed - No quality costs It then uses demand, ordering cost and holding cost. It multiplies demand by ordering cost divide by the carrying/holding cost

Question 47

What is the calculation for stock turn?

Answer 47

Sales/inventory Measures the number of times a stock item has been sold or consumed then replaced in a given period

Question 48

What are the 3 critical management tasks in the value stream?

Answer 48

Problem solving task Information management task Physical transformation

Question 49

Which KPIs can be measured for inventory management?

Answer 49

OTIF Lead times Service level Stock turn Stockouts Stock cover Costs

Question 50

What is inventory optimisation?

Answer 50

Managing stock levels to ensure there is availability when required but not so much to increase waste or handling costs.

Question 51

Give examples of inventory costs other than just the cost of product?

Answer 51

Insurance Storage Risk of obsolescence Opportunity cost Spoilage cost Wasted resources

Question 52

What methods can be used for inventory optimisation?

Answer 52

Good forecasting methods Reorder limits Periodic stock reviews ABC classification MRP/MRPII/ERP systems JIT Kanban Lean Safety/buffer used effectively

Question 53

Give the examples of mapping tools in the value stream? p.126

Answer 53

Process activity mapping SC Production variety- reviewing processing with varying activity Quality- e.g. defect identification Demand- where are issues in demand across SC Decision point- when is there push and pull moments Physical structure- are redesigns required

Question 54

Give examples of objective forecasting techniques

Answer 54

Averages Trends different cycle periods (think seasonality and growth) random errors Two main methods of statistical measures are: 1) Moving average 2) Weighted average

Question 55

Give examples of subjective forecasting techniques

Answer 55

Surveys- market or employee Expert knowledge Test marketing

Question 56

What is an exponentially weighted moving average?

Answer 56

This is a calculation where older data has a lower weight than newer, because new data is likely to be recent and therefore a better predictor

Question 57

What is inventory optimisation?

Answer 57

Stock levels to ensure sufficient inventory is available to meet demand but minimising the costs and risks associated with holding too much.

Question 58

What techniques can be used for inventory optimisation?

Answer 58

Forecasting effectively ABC classification of stock JIT MRP/ERP systems Kanban Lean Periodic stock checks

Question 59

When is opening stock measured?

Answer 59

It is at the start of an accounting period so could be a new financial year, a different reporting period or an ad hoc stock take

Question 60

What is safety/buffer stock?

Answer 60

This is stock held for contingency or insurance against unexpected demand or disruption in the SC. It reduces the risk of stockouts

Question 61

How can you mitigate against negative impact of service levels?

Answer 61

Using lead times and cost as part of the price evaluation Increased overall inventory Safety/ buffer stock Consignment stock VMI Robust SRM

Question 62

How is the level of safety stock calculated?

Answer 62

Needs to be a balance of increased holding costs vs risk of stockouts Involves: Statistical analysis of orders and lead times data to understand normal range of deviation Cost benefit analysis for each type of stock Risk management

Question 63

Give different ways that stock can be classified

Answer 63

1) Raw materials, WIP, Finished goods 2) Obsolete, redundant, surplus, dead, obsolescent 3) Indirect, direct 4) ABC classification

Question 64

How are direct supplies different different to indirect, generally?

Answer 64

Direct are incorporated into the finished product A higher overall value as greater quantity used Less variety vs MRO Quicker turnover (aka higher stock turn)

Question 65

When understanding the costs of inventory, what could be included in the acquisition cost?

Answer 65

Cost of requisition PO raising Supplier selection and approval Time IT platform ERP system costs Printed stationary Processing Handling Inspection Invoice matching Approval site preparation Can be bucketed into: Preparation placement Post placement

Question 66

What are the categories of cost associated with inventory?

Answer 66

Acquisition Holding Stockouts Reducing costs whilst maintaining service (e.g. VMI, understanding lead time as a cost, safety stock)

Question 67

How does an MRP system used MPS?

Answer 67

An MPS uses known demand and forecast demand to set out the scale and rate or production required to meet demand

Question 68

What are the advantages of ERP over MRPII?

Answer 68

Customer service levels Reduced inventory levels Better accuracy Improved cash flow Factory efficiencies Rework/scrap included