topic 17 - inventory management

Question 1

logistical management of inventory:
describe inventory

Answer 1

liaising with suppliers that provide materials for production, partly or completely finished goods (known as the supply chains)

Question 2

describe storage and warehousing

Answer 2

ensuring the appropriate storage of inventory including sending inventory to production departments if required.

Question 3

describe order processing

Answer 3

dealing with orders from customers to ensure they receive the correct products.

Question 4

describe distribution

Answer 4

deciding on the best method of distribution to get the product to the customer. Distribution methods can include:
- road/rai/air/sea etc
- utilities infrastructure (pipes and cables over/under the highway.)
- satellite/cable/mobile networks (referring to wi-fi services)

Question 5

overstocking and understocking:
consequences of overstocking

Answer 5

• supplies could go out of date if they are stored for too long.
• supplies could go out of fashion before they are used.
• too many supplies leaves a risk of theft by staff, customers or thieves.
• the business will have to pay for stockholding costs, such as insurance and security.
• the opportunity cost of money being tied up in inventory which could be better used elsewhere in the business.

Question 6

consequences of understocking

Answer 6

• the business may run out of inventory and be unable to continue production or carry on selling.
• the business will not benefit from bulk buying discounts due to making smaller orders.
• there may be no goods to sell, resulting in a bad reputation and customers not returning.
• there will be an increase in delivery costs since many smaller deliveries will have to be made.
• there will be an increase in administration costs, e.g. paying staff to browse for supplies, complete order forms, settle invoices, etc.

Question 7

inventory management control system:
describe maximum inventory level

Answer 7

this is the most amount of inventory that should be held.

Question 8

describe minimum inventory level

Answer 8

this is the least amount of inventory that should be held.

Question 9

describe re-order level

Answer 9

the level at which inventory is re-ordered. Computerised inventory systems link to EPOS and automatically re-order goods.

Question 10

describe re-order quantity

Answer 10

this is the amount that is ordered

Question 11

describe lead time

Answer 11

this is the time taken between an order being placed and inventory arriving.

Question 12

describe buffer inventory

Answer 12

this is the extra inventory below the agreed minimum to be used in emergencies.

Question 13

justification for maximum inventory level

Answer 13

setting this level avoids consequences of overstocking.

Question 14

justification for minimum inventory level

Answer 14

allows the business to not suffer from the consequences of understocking

Question 15

justification for re-order level

Answer 15

this avoids running out of inventory.

Question 16

justification for re-order quantity

Answer 16

this ensures the quantity ordered is not too much or too little.

Question 17

justification for lead time

Answer 17

as short a lead time as possible allows the business to react to rush orders.

Question 18

justification for buffer inventory

Answer 18

this ensures that production doesn’t stop and sales continue to be made.

Question 19

factors on setting inventory levels

Answer 19

• the maximum inventory level depends on the storage available, the cost of storing goods and the maximum amount of demand.
• the minimum inventory level depends on the relationship with suppliers, the skill levels of staff so materials are not wasted, the finance available, the minimum amount of demand and the likelihood of drastic changes to tastes and fashions.
• the re-order level depends on lead time, the amount of inventory already held, if bulk-buying discounts are available, and the maximum and minimum inventory levels themselves.

Question 20

describe just-in-time (JIT)

Answer 20

This in an alternative approach to inventory management. It is the process of ordering supplies only whenthey are either required for production, or when an order is placed by a customer.

Question 21

advantages of JIT

Answer 21

• allows production to be lean, i.e. there is no wastage as all inventory is used for production.
• no money is tied up in inventory, improving cash flow and working capital.
• no warehouse is required, saving costs.
• the business is more responsive to changing external factors.

Question 22

disadvantages of JIT

Answer 22

• if deliveries are late then the business will face the negative consequences of understocking.
• requires excellent relationships with suppliers to work efficiently, which can take time to develop.
• relies on a good infrastructure between the business and suppliers, e.g. roads.

Question 23

describe centralised storage

Answer 23

this involves storing inventory in one central location in a large, purpose-built warehouse.

Question 24

advantages of centralised storage

Answer 24

• specialist staff are employed to maintain inventory, which improves speed of inventory handling and security.
• centralised warehouses can store a massive amount of inventory, benefitting from economies of scale.
• the same procedures for issuing inventory are used across the organisation, improving consistency.
• it may be cheaper to store inventory in one large warehouse than the total cost of many smaller on-site storerooms.

Question 25

disadvantages of centralised storage

Answer 25

- inventory has to be delivered to each division or department, causing delays. - specialist staff need to be employed to maintain inventory, increasing wage costs. - specialist equipment needs to be purchased and maintained. - inventory usage levels and needs are unclear as divisions need to communicate with the warehouse.

Question 26

describe decentralised storage

Answer 26

this involves storing inventory in many locations in smaller warehouses or store rooms.

Question 27

advantages of decentralised storage

Answer 27

- inventory is always close at hand when needed for production or to sell to customers. - smaller, more local warehouses are more responsive to local needs. - inventory usage reflects production as it is stored in factories or retail outlets. - smaller amounts of inventory result in no negative consequences of overstocking.

Question 28

disadvantages of decentralised storage

Answer 28

- can lead to wastage or theft of inventory as security isn't as good as it is in centralised storage. - lack of specialist staff can lead to inventory control being clumsy and inefficient. - each division may handle inventory differently, leading to incosistency and problems being harder to pinpoint for senior management. - smaller amounts of inventory result in negative consequences of understocking.

Question 29

advantages of computerised inventory control

Answer 29

- databases keep balances of inventory which are automatically updated. - can be linked to tills through EPOS, which update inventory levels with each sale. - accurate and constant monitoring of inventory levels allows for automatic re-ordering. - allows for decisions on slow-moving inventory or best sellers to be made by managers from their competitors. - can highlight regional variations in inventory for head office. - can highlight seasonal shifts in demand. - is a deterrent to theft by staff as they know inventory levels are monitored closely.

Question 30

disadvantages of computerised inventory control

Answer 30

- computerised systems will cost a lot of money to install and maintain. - money and time need to be invested to train staff to operate the sytem effectively. - crashes and breakdowns can hold up re-orders and production.

Question 31

describe the role of the logistics manager

Answer 31

- planning inventory required using production and sales budgets - organising for the resources needed for logistics, including warehouse equipment and staff - commanding warehouse staff to carry out tasks - co-ordinating the supply chain, channels and methods of distribution so deliveries are made on time - controlling the quality, quantity, cost and efficiency of the movement and storage of inventory, etc. - delegating inventory procedures to decentralised warehouses. - motivating other members of their team.