Inventory Management Basics

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Questions and Answers

What type of inventory requires close monitoring and tight control?

X class items (correct)

Desirable items

Non-moving inventory

Slow-moving inventory

What is the primary purpose of XYZ analysis?

To classify inventory items according to their usage

To control obsolescence

To determine the inventory valuation inside the stores (correct)

To optimize resource allocation

What type of inventory management involves having an additional set of goods on hand as a preventive measure for market volatility?

Safety stock (correct)

Buffer inventory

Obsolete inventory

Inventory classification

What type of items would come to a halt or be drastically affected if they are not available?

Vital items Signup and view all the answers

What is the purpose of identifying and managing obsolete inventory?

To identify and manage for disposal or sale Signup and view all the answers

What is a characteristic of static models in production planning and control?

They operate within a fixed time frame Signup and view all the answers

What is an application of static models in production planning and control?

Production scheduling Signup and view all the answers

What are the two main aspects of inventory problems?

Procurement of commodity and its future demand Signup and view all the answers

What are the three categories of knowledge of demand?

Exact future demand, probability distribution, and uncertain demand Signup and view all the answers

What type of inventory is classified as those items whose stock-out cost is very high for the company?

Essential items Signup and view all the answers

What is the distinction between outside supply and self-supply or self-manufacturing?

Outside supply involves a probability distribution of time lag, while self-supply has a constant time lag Signup and view all the answers

What is the purpose of FSN analysis?

To control obsolescence Signup and view all the answers

What is a limitation of static models in production planning and control?

They might not be suitable for addressing scenarios with significant variations Signup and view all the answers

What is the difference between one-shot decision and repetitive decision?

One-shot decision involves a single purchase, while repetitive decision involves multiple purchases Signup and view all the answers

What is the difference between constant and probability distribution of demand?

Constant demand is expected over a span of time, while probability distribution of demand varies with time Signup and view all the answers

What is the significance of time lag in inventory problems?

It affects the procurement process and decision-making Signup and view all the answers

What is the primary purpose of incremental analysis?

To assess the financial impact of a specific business decision Signup and view all the answers

What is the term for the financial impact associated with uncertainties and potential disruptions in production planning and control?

Cost of risk Signup and view all the answers

Which of the following is NOT a common decision criterion under uncertainty?

Efficiency measurement Signup and view all the answers

What is the primary goal of managing the cost of risk in production planning and control?

To ensure operational resilience and optimize business performance Signup and view all the answers

What is scenario analysis used for in production planning and control?

To evaluate the potential costs and benefits of different production scenarios Signup and view all the answers

What is the term for the ability to adapt and change production plans quickly in response to unforeseen events or changes in market conditions?

Flexibility Signup and view all the answers

What is the primary purpose of lead time in production planning and control?

To consider the time required to implement various production plans Signup and view all the answers

What is the primary difference between incremental analysis and cost-benefit analysis?

Incremental analysis evaluates the impact of changes in production levels, while cost-benefit analysis evaluates the potential costs and benefits of different production scenarios Signup and view all the answers

What is the primary purpose of inventory management in production planning and control?

To meet customer demand and support production activities Signup and view all the answers

What is the classification of inventory based on importance, price, and sales volume?

ABC analysis Signup and view all the answers

What is the primary benefit of applying the ABC analysis of inventory control?

Minimizing the costs of carrying products Signup and view all the answers

What is the characteristic of A class items in the ABC analysis?

Expensive, high-class items with tight controls and small inventories Signup and view all the answers

What is the main purpose of batch tracking in inventory management?

To group goods of the same production date and materials together Signup and view all the answers

What is the primary goal of effective inventory management?

To achieve a balance between supply and demand Signup and view all the answers

What type of inventory includes components, work-in-progress, and finished goods?

Production inventory Signup and view all the answers

What is the primary benefit of implementing effective inventory management?

Optimizing costs and enhancing overall operational efficiency Signup and view all the answers

What is the primary objective of carrying inventory in a company?

To ensure the availability of sufficient goods to meet anticipated demand Signup and view all the answers

What type of cost is involved in the analysis of inventory problems, which is related to the hiring and firing of employees?

Set up cost Signup and view all the answers

What is the purpose of VED analysis in inventory management?

To determine the level of inventory control for vital, essential, and desirable parts Signup and view all the answers

What is the primary reason for holding stocks, according to the objectives of carrying inventory?

To ensure the availability of sufficient goods to meet anticipated demand Signup and view all the answers

What is the classification of inventory items in ABC analysis, which requires a moderate level of control?

B category Signup and view all the answers

What is the term used to describe the cost of carrying and not carrying inventory?

Stockage cost Signup and view all the answers

What is the purpose of ABC analysis in inventory management?

To determine the level of inventory control for high, moderate, and low-cost items Signup and view all the answers

What is the classification of inventory items in VED analysis, which requires a high level of inventory control?

Vital category Signup and view all the answers

Study Notes

Definition of Inventory

Inventory refers to the stock of materials, components, work-in-progress (WIP), and finished goods held at various stages of the production process.
It represents the tangible assets that an organization maintains to meet customer demand, support production activities, and ensure a smooth and efficient operation of the supply chain.

Types of Inventory and Classification

ABC Analysis: classifies stocks based on their importance, price, and sales volume into three categories:
- A class: expensive, high-class items with tight controls and small inventories
- B class: average-priced, mid-priority items with medium sales volume and stocks
- C class: low-value, low-cost items with high sales and huge inventories
Batch Tracking: groups goods of the same production date and materials together to track information such as origin, destination, and expiration date.
Safety Stock: an additional set of goods held as a preventive measure for market volatility, ensuring a smooth flow of materials and covering uncertainties in supply performance.

Structure of Inventory Problems and Analysis

Two aspects: procurement of commodities and future demand
Six components of inventory problems:
- Knowledge of demand: certainty, risk, and uncertainty
- Procurement process: outside supply and self-supply
- Decision process: one-shot and repetitive decisions
- Probability distribution of demand: constant or varying with time
- Time lag: constant or probabilistic
- Relevant cost considerations: procurement, setup, carrying, and systemic costs

Objectives of Carrying Inventories

To ensure availability of sufficient goods to meet anticipated demand
To absorb variations in demand and production
To provide a buffer between production processes
To obtain discounts on bulk purchases
To meet possible shortages in the future
To absorb seasonal fluctuations in demand
To retain a smooth production process
To serve as a necessary part of the process

Selective Inventory Analysis

ABC Analysis: classifies inventory items into three categories based on their importance and control level
VED Analysis: classifies inventory items into vital, essential, and desirable categories based on their criticality for the industry or company
FAST, SLOW, & NON-MOVING (FSN) Analysis: classifies inventory items into three categories based on their usage frequency
XYZ Analysis: classifies inventory items into three categories based on their variability of demand and stock value

Static Model

A mathematical or analytical representation of a production system that does not change over time
Characteristics:
- Fixed time frame
- No consideration of time dynamics
- Steady-state assumption
- Limited adaptability
Applications:
- Production scheduling
- Inventory management
- Capacity planning

Incremental Analysis

A decision-making tool that evaluates the impact of changes in production levels or other variables on the overall cost and profitability
Steps:
1. Identify relevant factors
2. Calculate incremental costs and revenues
3. Compare incremental values
4. Make informed decisions
Example: analyzing the additional costs and revenues associated with increasing production by 100 units

Cost of Risk and Decision Criteria Under Uncertainty

Cost of risk: the financial impact of uncertainties and potential disruptions in production planning and control
Decision criteria:
- Risk tolerance
- Flexibility
- Cost-benefit analysis
- Resilience
- Lead time
- Scenario analysis

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Description

Learn about the definition of inventory, its role in the production process, and the ABC Analysis classification method.