Week 1 - Operations And Inventory

Question 1

What is inventory?

Answer 1

Is the stored accumulation of material resources in a system

Question 2

Why does inventory occur?

Answer 2

When demand and supply are not synchronised

Question 3

What do complex processes suffer from? (4)

Answer 3

• Transportation delays
• Limitations in production processes
• Uncertainties in customer demand
• Range of different supplier capabilities

Question 4

Example of a complex process

Answer 4

Question 5

What is the typical inventory carrying cost percentage per year?

Answer 5

Around 40%

Question 6

Examples of inventory carrying costs (7)

Answer 6

• Cost of capital / labour
• Ageing - damaged quality over time e.g dirty or unusable
• Warehouse cost
• Pilferage/shrinkage - inventory being stolen
• Tax & Insurance
• Materials handling - movement of inventory using machinery
• Obsolescence - process of becoming outdated and no longer used

Question 7

What are the benefits of inventory? (2)

Answer 7

• It provides some security against uncertain supply and demand
• It allows for the separation of successive operations with different throughput rates

Question 8

Implications of excessive inventory (3)

Answer 8

• It is costly tying up working capital
• It takes up valuable space incurring storage costs
• Inventory is at risk of deterioration, obsolescence, pilferage etc.

Question 9

Name different forms of inventory (10)

Answer 9

• Small tools - items used in manufacturing
• Spares - kept for repair purposes
• Waste - may have value such as scrap metal
• Finished goods
• Work in process
• Goods in transit
• Consumables - oil, cleaning fluid, stationery etc
• Raw materials
• Purchased parts
• Packaging

Question 10

Why would you have raw materials in inventory? (7)

Answer 10

• Attractive exchange rates (more cost effective)
• Reduced unit warehouse costs (supplier discounts due to economies of scale)
• Reduced unit freight cost (less shipments made due to larger shipments saving on transportation costs)
• Units cannot be supplied on demand
• Anticipated price rises
• Supplier discounts
• Uncertain lead times

Question 11

Why would you have work in process (wip) in inventory? (3)

Answer 11

• Production rates uneven
• Poor layout/large distance between processes
• Enables operations to be disconnected (for maintenance, strikes etc)

Question 12

Why would you hold finished goods in inventory? (4)

Answer 12

• Display of products
• Exchange policy
• More economic that back ordering (cost savings, back ordering can lead to dissatisfied customers due to lead times in delivery or production)
• Variation in customer demand

Question 13

Why is it better to hold raw materials that finished goods in inventory? (4)

Answer 13

• Raw materials generally have a longer shelf life
• Higher volumetric storage deterioration (store large quantities at lower cost)
• Lower obsolescence cost due to wider application
• Stock cover lower as its quicker to find alternative supply

Question 14

Explain the component flexibility funnel

Answer 14

The further along the production line the fewer opportunities exist for putting the item into alternative consumer offerings

Question 15

What is the two-way categorising of inventory?

Answer 15

• Dependant demand inventory
• Independent demand inventory

Question 16

What is independent demand inventory? (3)

Answer 16

• Includes items that are not dependant upon the demand of other items
• Tend to be more finished products destined for final consumers
• Demand for this inventory is solely on the requirements of the customer

Question 17

What is dependant demand inventory? (2)

Answer 17

• Includes items that are usually assemblies or parts used in manufacture of the final products
• Quantity depends on demand for the subsequent part in the system

Question 18

What is the difference between the way dependant and independent demand inventory is managed? (2)

Answer 18

• Dependant - managed using software integrating operations with purchasing
• Independent - via accurate forecasting and reduction of uncertainty

Question 19

Four-way categorising of inventory

Answer 19

• Buffer inventory / safety stock
• Cycle/batch inventory
• Anticipation (seasonal) inventory
• Pipeline inventory

Question 20

What is buffer inventory/safety stock? (2)

Answer 20

• Compensates for the uncertainties inherent in supply and demand
• Aims to avoid stock outs referred to as “just in case” stock

Question 21

What is cycle/batch inventory?

Answer 21

Occurs because one or more stages in a process cannot supply all the items it produces simultaneously

Question 22

What is anticipation (seasonal) inventory? (2)

Answer 22

• Compensates for differences in timing of supply and demand (also known as hedging inventory)
• E.g Seasonal food like Easter eggs or Christmas decorations

Question 23

What is pipeline inventory? (2)

Answer 23

• Materials cannot be transported instantaneously between the point of supply and point of demand
• From the time supplier allocates stock in warehouse to the time it becomes available to the retailer the inventory is “in the pipeline”

Question 24

How should buffer inventory be approached? (2)

Answer 24

• Find ways to forecast more accurately
• Find ways of reducing uncertainty in supply and demand

Question 25

How should cycle inventory be approached?

Answer 25

Identify ways of improving production process e.g potentially making smaller batches of products more frequently

Question 26

How should anticipation inventory be approached

Answer 26

Find ways of passing necessary inventory (or capacity) onto customers or suppliers

Question 27

How should pipeline inventory be approached? (2)

Answer 27

• Identifying any faster modes of transportation
• Potentially changing our location or suppliers location

Question 28

Compare air and surface transport (2)

Answer 28

• 99.5% of goods are transported by surface modes of transport
• 34.6% of the value of global trade is by air transport

Question 29

Explain the stock-take process

Answer 29

Involves counting each item in stock and multiplying it by its value (which is usually the cost of purchasing the item - the depreciation figure) summing up the individual items stored

Question 30

What should you consider when comparing the value of inventories between two different companies? + example

Answer 30

• Must be between two similar companies as value could be relatively small compared to cost of total inputs or it could be too high, especially where storage is the prime purpose
• E.g A hotel will have relatively small inventories in relation to the labour, building and running costs but a jewellers will have a very high value inventory compared to running costs

Question 31

Two ways of measuring inventory

Answer 31

• Stock cover
• Stock turn

Question 32

What is stock cover? + formula

Answer 32

• Is the amount of time the inventory would last it it were not replenished
• Stock cover = stock/demand

Question 33

What is stock turn? + formula

Answer 33

• Is how often the stock is used up in a given period
• Stock turn = demand/stock

Question 34

What are the three Inventory turnover formulas?

Answer 34