Podcast
Questions and Answers
Which of the following is the most direct reason for businesses to maintain finished goods inventory?
Which of the following is the most direct reason for businesses to maintain finished goods inventory?
- To meet immediate customer demand without delays caused by production lead times. (correct)
- To capitalize on discounts offered by suppliers for bulk purchases.
- To minimize storage costs associated with raw materials and work-in-progress.
- To ensure consistent production schedules regardless of demand fluctuations.
A manufacturer of seasonal decorations anticipates a surge in demand during a specific holiday season. What inventory strategy would be most effective for them?
A manufacturer of seasonal decorations anticipates a surge in demand during a specific holiday season. What inventory strategy would be most effective for them?
- Maintaining a minimal inventory level to avoid obsolescence costs.
- Stockpiling goods in the months leading up to the holiday season. (correct)
- Implementing a just-in-time (JIT) system to reduce storage costs.
- Ordering raw materials only when customer orders are received.
What is the primary purpose of buffer stock?
What is the primary purpose of buffer stock?
- To minimize the costs of holding inventory over long periods.
- To meet unexpected increases in demand or disruptions in supply. (correct)
- To take advantage of fluctuations in raw material prices.
- To streamline the production process by ensuring a steady flow of materials.
A business with limited working capital faces challenges in maintaining optimal inventory levels. What is the most likely consequence of this situation?
A business with limited working capital faces challenges in maintaining optimal inventory levels. What is the most likely consequence of this situation?
Which factor would most likely cause a business to increase its minimum level of inventory?
Which factor would most likely cause a business to increase its minimum level of inventory?
A company is considering increasing its order quantity to take advantage of a supplier discount. What factor should they primarily consider before making this decision?
A company is considering increasing its order quantity to take advantage of a supplier discount. What factor should they primarily consider before making this decision?
A firm aims to minimize inventory holding costs while ensuring sufficient stock to meet demand. What strategy aligns with this goal?
A firm aims to minimize inventory holding costs while ensuring sufficient stock to meet demand. What strategy aligns with this goal?
What does the 're-order level' in a stock control diagram indicate?
What does the 're-order level' in a stock control diagram indicate?
In a stock control diagram, if the lead time for an item increases but the rate of usage remains constant, how should the re-order level be adjusted?
In a stock control diagram, if the lead time for an item increases but the rate of usage remains constant, how should the re-order level be adjusted?
Based on the principles of inventory control, why might a bakery that produces fresh daily goods maintain very low inventory levels?
Based on the principles of inventory control, why might a bakery that produces fresh daily goods maintain very low inventory levels?
Flashcards
Work-in-progress
Work-in-progress
Goods that are partly finished in the production process.
Buffer stock
Buffer stock
Inventory held to cover unforeseen demand increases or supply disruptions.
Re-order level
Re-order level
The level of stock at which a new order is placed.
Re-order quantity
Re-order quantity
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Lead time
Lead time
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Raw materials and components
Raw materials and components
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Inventory control
Inventory control
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Stock control diagram
Stock control diagram
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Finished goods
Finished goods
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Study Notes
- Inventory control involves managing the levels of raw materials, work-in-progress, and finished goods to meet demand while minimizing costs e.g., storage.
Learning Objectives of Inventory Control
- Understanding the interpretation of an inventory control diagram.
- Understanding the role and importance of buffer inventory.
- Recognizing the implications of poor inventory control practices.
- Understanding the just-in-time (JIT) inventory system.
- Understanding the role of waste minimization in inventory management.
- Gaining a competitive advantage through lean production methods.
Reasons for Holding Inventory
- Businesses hold raw materials, semi-finished goods, and finished goods for various reasons.
- Raw Material inventories are kept to cope with fluctuations in production levels and avoid delays, acting as a buffer against supply disruptions.
- Work-in-progress inventories consist of partly finished goods, such as televisions on an assembly line.
- Finished goods inventories are maintained to meet changes in demand and fulfill urgent orders without needing to quickly increase production rates.
Inventory Control
- Maintaining optimal inventory levels is a crucial aspect of inventory control.
- The goal is to keep inventory levels as low as possible to minimize holding costs.
- It is important that businesses do not run out of inventory, thereby preventing production halts and disappointing customers.
- Several factors affect inventory levels
Factors Influencing Inventory Levels
- Demand: Sufficient inventory must be maintained to satisfy typical demand and cover potential sales growth and unexpected surges.
- Buffer Stocks: Buffer stocks are inventories kept to cover unforeseen increases in demand or supply interruptions.
- Stockpiling: Some businesses accumulate inventory to prepare for seasonal demand changes, such as toy production before Christmas.
- Inventory Costs: The costs of holding inventory influences how much inventory is kept. If storage is very expensive, then quantities kept on hand will be lower.
- Working Capital: Limited working capital can hinder a business's ability to buy more inventory, even when needed.
- Type of Inventory: Perishable products such as food have small inventory levels.
Other Inventory Considerations
- Stocks can become obsolete when replaced by newer models.
- Lead Time: Longer lead times require higher minimum inventory levels.
- External Factors: Concerns about future shortages can push firms to store more raw materials.
Stock Control Diagram Interpretation
- Stock control diagrams illustrate the flow of stock in a business.
- The diagram highlights both re-order quantity and re-order level.
- Re-order quantity refers to the amount of stock that is ordered when a new order is placed.
- Re-order level refers to the stock level at which a new order is triggered.
Stock Control Diagram Example
- In the example given: 50,000 units are used every two months.
- The maximum stock level is 70,000 units
- The minimum stock level is 20,000 units
- The stock is re-ordered when the re-order level hits 40,000 units
- The re-order quantity is 50,000 units.
- Lead time is just under 1 month.
Stock Control Diagram Limitations
- Differences can occur between the diagram's assumption and the practice.
- Deliveries can be sometimes late.
- The reorder quantities may need to be occasionally reviewed.
- Suppliers could offer discounts for ordering larger quantities.
- Quantities of stock used in each time period may not be constant.
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