Working Capital Management - Inventory Flashcards
(18 cards)
Why do firms hold inventory?
Transaction motive, precautionary motive, speculative motive.
What is the transaction motive in regards to holding inventory?
To meet production and sales requirements.
What is the precautionary motive in regards to holding inventory?
Hold additional stocks to cover the possibility that future production and sales requirements may have been underestimated. Applies when future demand is uncertain.
What is the speculative motive in regards to holding inventory?
Expected future prices may change. Firm may maintain higher/lower stock levels to speculate an increase/decrease in future price.
What is the definition of demand?
Customer requirement for goods.
Lead time definition
Time between placing an order and receiving the goods.
Economic Order Quantity (EOQ) definition
The optimum inventory quantity that should be ordered to minimise holding and ordering costs.
Re-order Level definition
The point at which more inventory must be ordered to avoid running out of inventory (stockout).
Stockout definition
When the business does not have any inventory.
Buffer (safety) Inventory
Inventory held in case of problems or emergencies.
List some holding costs.
Insurance, rent, heat, security, warehouse staff wages]
Cost of obsolescence and deterioration of inventory]
What are the costs associated with inventory?
Purchase price, ordering costs, holding costs
Use of forecasts of future demand
Forecasts should deal with each product and must be realistic]
Forecasts can be developed using statistical techniques or sales staff judgements]
What is the ABC system of inventory control?
The ABC system of inventory control is an inventory management technique that determines the value of inventory items based on their importance to the business. ABC ranks items on demand, cost and risk data and inventory managers organise items into categories based on those criteria.
When can the EOQ be used?
If a firm is operating in a very stable usage environment and delivery costs can be predicted accurately, EOQ can be used.
List some of the assumptions/limitations of EOQ.
[Demand is certain, constant and continuous over time].
[There are no stock-outs].
[Inventory is used evenly over time and falls to zero before being replaced].
[The supply lead time is constant and certain].
[Inventory can be purchased in exactly the quantities required].
What is the Material Requirements Planning model (MRP)?
MRP is a system designed to plan manufacturing production. It identifies necessary materials, estimates quantities, determines when materials will be required to meet the production schedule, and manages delivery timing - with the goals of meeting demands and improving overall productivity.
List some other factors influencing the choice of order quantity.
[Shortage of future supplies - danger of strike, import problems, transportation difficulties].
[Future price increases - may be of benefit to buy in excess of current requirement].
[Obsolescence - change in technology/fashion, perishable goods].
