Inventory Management Basics

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Questions and Answers

What is a primary benefit of employing DRP in inventory management?

  • Increased warehouse storage
  • Greater production lead time
  • Higher freight costs for customers
  • Improved customer service and on-time deliveries (correct)

Which factor is NOT considered in the Demand-Driven Planning (DRP) process?

  • Re-order points
  • Order quantities
  • Supplier relationship quality (correct)
  • Average performance cycle length

What is the main goal of Just-In-Time (JIT) inventory management?

  • Increase the level of safety stock
  • Minimize production time by increasing excess inventory
  • Align production with customer demand and reduce waste (correct)
  • Encourage larger batch production to save on costs

Which of the following is a key principle of JIT?

<p>Production only when there is demand (C)</p> Signup and view all the answers

Which benefit is associated with JIT methodology?

<p>Faster response to customer needs (A)</p> Signup and view all the answers

What is a primary reason for carrying inventory in an organization?

<p>To ensure raw materials are available for production (C)</p> Signup and view all the answers

Which characteristic of inventory makes it a risky investment?

<p>Irreversible investment of funds (A)</p> Signup and view all the answers

In a supply chain, which entity faces long-term risks associated with inventory?

<p>Manufacturer (C)</p> Signup and view all the answers

What role does inventory play in customer service?

<p>It provides items for after-sales support (B)</p> Signup and view all the answers

Which of the following is NOT a reason for maintaining inventory?

<p>To allow for product appreciation (B)</p> Signup and view all the answers

Why might a wholesaler experience increased risk in managing inventory?

<p>Because of bulk purchasing and diverse product lines (B)</p> Signup and view all the answers

What is one of the key reasons inventory is crucial for manufacturing organizations?

<p>Ensures availability of spare parts and maintenance supplies (A)</p> Signup and view all the answers

How does inventory help in addressing uncertainties in demand and supply?

<p>By holding larger stocks to mitigate delays (C)</p> Signup and view all the answers

What is the primary reason for companies to focus on resource optimization in inventory management?

<p>To reduce inventory levels and maintain profit margins (A)</p> Signup and view all the answers

Which type of inventory is specifically associated with partially finished products in production?

<p>In-process inventories (D)</p> Signup and view all the answers

How does advanced information technology contribute to inventory management?

<p>By helping manage inventory efficiently and reducing stock levels (C)</p> Signup and view all the answers

What characterizes items classified as 'A' in ABC analysis?

<p>They are few in number but account for a large percentage of inventory cost. (D)</p> Signup and view all the answers

What is a key feature of perpetual inventory control?

<p>Daily reviews are conducted to determine replenishment needs. (B)</p> Signup and view all the answers

Which type of inventory is maintained to cushion against unpredictable demand fluctuations?

<p>Fluctuation inventories (B)</p> Signup and view all the answers

What does the term 'Let-size inventories' refer to?

<p>Excessive stock quantities to lower per-unit buying costs. (C)</p> Signup and view all the answers

Which inventory type consists of completed products that are ready for sale?

<p>Finished goods inventories (A)</p> Signup and view all the answers

What characteristic of C items in inventory management is true?

<p>They are numerous but contribute less than 10% to inventory cost. (D)</p> Signup and view all the answers

Which classification in VED analysis is NOT accurately described?

<p>Vital items are reviewed periodically and ordered in bulk. (C)</p> Signup and view all the answers

In SAP analysis, how are items categorized regarding supply limitations?

<p>Scarce, Available, and Plenty. (C)</p> Signup and view all the answers

What is a primary benefit of using the Economic Order Quantity (EOQ) model?

<p>Helps avoid overstocking and understocking. (B)</p> Signup and view all the answers

Which of the following assumptions is NOT included in the EOQ formula?

<p>Lead time is variable. (D)</p> Signup and view all the answers

What is the main goal of Materials Requirement Planning (MRP)?

<p>To ensure materials are available for production at the right time. (A)</p> Signup and view all the answers

How does Distribution Requirement Planning (DRP) differ from MRP?

<p>DRP is based on customer demand. (D)</p> Signup and view all the answers

Which type of item in SDE Classification is described as requiring imports?

<p>S items (B)</p> Signup and view all the answers

Flashcards

Distribution Requirements Planning (DRP)

A method for planning the distribution of goods across an organization, taking into account factors like demand and safety stock levels.

Just-In-Time (JIT)

Minimizes product waste and storage costs by producing or acquiring items only when needed.

Inventory Reduction (JIT)

Reduces storage costs by minimizing the amount of inventory a company keeps.

Demand-Driven Production (JIT)

Products are created or purchased only when there is a confirmed order or forecast.

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Waste Minimization (JIT)

Focuses on eliminating any unnecessary materials, time, or effort during the production process.

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C items

Items that contribute less than 10% to the total inventory cost.

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VED Analysis

A method for classifying inventory based on its importance to operations.

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SAP Analysis

A method for classifying inventory based on its availability.

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FSN Analysis

A method for classifying inventory based on its consumption patterns.

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Inventory Management

The practice of managing the amount of raw materials, components, and finished goods a business keeps on hand.

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SDE Classification

A method for classifying items based on availability challenges.

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Economic Order Quantity (EOQ)

A fundamental inventory management formula to determine the optimal order quantity.

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Resource Optimization (Inventory)

Reducing inventory levels to optimize resource usage (money and space) and increase profitability.

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Materials Requirement Planning (MRP)

A system that plans production and raw material purchases based on finished goods needs.

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Modern Inventory Practices

Methods like JIT (Just-in-Time) and lean manufacturing that minimize inventory to avoid waste and improve efficiency.

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Production Inventory

A type of inventory that includes raw materials, parts, and components used in manufacturing.

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In-Process Inventory

A type of inventory that includes partially finished products at different stages of the production process.

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MRO Inventory

A type of inventory that includes items used for maintenance, repairs, and operations, but not part of the final product.

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Finished Goods Inventory

A type of inventory that consists of completed products ready for sale.

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Perpetual Inventory Control

A method of inventory control that involves continuously monitoring stock levels and ordering replenishments daily.

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What is inventory?

The stock of materials, goods, or assets held by an organization for future use, sales, or processing.

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What are the components of inventory?

Materials or goods on hand at a specific time. A detailed list of physical assets. The quantity of items available. The value of stock held (in financial terms).

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How does inventory help meet production needs?

Ensuring raw materials, components, and parts are available to maintain continuous production.

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How does inventory support operations?

Provides spare parts, lubricants, and maintenance supplies needed for smooth operations and repairs.

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How does inventory improve customer service?

Helps maintain stock for after-sales support, improving customer satisfaction and competitive advantage.

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What is speculation in inventory?

Holding large inventories for potential benefits, though not critical for industrial purposes.

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What is the role of precaution in inventory?

Addressing uncertainties in demand and supply, reducing delays and extra costs.

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Why is inventory a risky investment?

Once funds are used to purchase inventory, they cannot be repurposed for other uses, making inventory investments risky.

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Study Notes

Inventory Management

  • Inventory refers to goods, materials, or assets held for future use, sale, or processing
  • Common in various sectors (businesses, hospitals, farms, governments)

Inventory Components

  • Physical goods on hand at a specific time
  • Detailed list of physical assets
  • Quantity of items available
  • Financial value of the stock

Inventory Types

  • Raw materials
  • In-process items
  • Finished goods
  • Packaging
  • Tools, equipment, spare parts (for future demand/distribution)

Reasons for Holding Inventory

  • Meeting production needs
  • Supporting operations
  • Customer service needs
  • Hedging against future expectations

Inventory Characteristics

  • Irreversible investment (funds cannot be repurposed)
  • Risks: theft, obsolescence, depreciation

Inventory Risks by Role in Supply Chain

  • Manufacturer: Long-term risks from raw materials to finished goods, risks transferring inventory between warehouses
  • Wholesaler: Multiple product lines, bulk buying, selling in lots, seasonal items lead to risks stocking well in advance

The Need for Inventory Control

  • Essential for manufacturing organizations to match production with customer demands
  • Ensures raw materials, components, and parts are available
  • Provides spare parts, lubricants, and maintenance supplies
  • Improves customer satisfaction and competitive advantage

Inventory Management Techniques

  • ABC Analysis: Classifies items based on inventory cost (A - high, B - moderate, C - low)
  • VED Analysis: Classifies items as Vital, Essential, or Desirable based on operational importance
  • SAP Analysis: Categorizes items based on supply limitations (Scarce, Available, Plenty)
  • FSN Analysis: Categorizes items as fast-moving, slow-moving, or normal-moving
  • SDE Classification: Classifies items based on availability (Scarce, Difficult to obtain, Easily available)

Inventory Planning Models

  • Economic Order Quantity (EOQ): A fundamental formula to minimize total inventory costs (ordering costs + holding costs)

EOQ Formula

  • EOQ = √(2DS/H)
    • D = Annual demand
    • S = Ordering cost per order
    • H = Holding cost per unit per year

Material Requirements Planning (MRP)

  • System that schedules production and raw material purchases based on finished goods needs
  • Considers production schedules, system structure, and current inventory levels

Distribution Requirements Planning (DRP)

  • Coordinates inventory across multiple distribution stages
  • Driven by customer demand, unlike MRP which is production-driven.

Just-In-Time (JIT) Inventory

  • Minimizes inventory levels, reduces storage costs
  • Produces or acquires goods only when needed
  • Aimed to align production with customer demand

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