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Production Planning and Control: Inventory Management

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40 Questions

What is inventory in the context of production planning and control?

The stock of materials, components, work-in-progress, and finished goods

What is the main purpose of effective inventory management?

To achieve a balance between supply and demand, optimize costs, and enhance overall operational efficiency

What are the three main types of inventory?

ABC Analysis, Batch Tracking, and Stock Classification

What is the main purpose of ABC Analysis?

To classify stocks based on their importance, price, and sales volume

What are the three categories of items in ABC Analysis?

A class, B class, and C class

What is the benefit of applying ABC Analysis?

To minimize the costs of carrying products while maximizing their stock returns

What is Batch Tracking?

A method of tracking goods of the same production date and materials

What is the main difference between ABC Analysis and Batch Tracking?

ABC Analysis classifies items based on their importance and price, while Batch Tracking groups goods of the same production date and materials

Warehouse managers can keep track of which information using a specific system?

Where the items come from and where the goods are heading

What is the purpose of safety stock?

To act as a safety net for market volatility and supply uncertainty

What type of inventory is classified as items that are no longer in demand or have exceeded their shelf life?

Obsolete inventory

What are the two main aspects of inventory problems?

Procurement of commodity and its future demand

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

One-shot decision is for static inventory problems, while repetitive decision is for dynamic inventory problems

What is the result of variation in the major structural components of the general inventory problems?

Difference in practical inventory problems

What is the significance of time lag in inventory management?

It affects the analysis of inventory problems

What is the purpose of buffer inventory?

To absorb fluctuations in production and demand

What is the main objective of carrying inventory?

To ensure the availability of sufficient goods to meet anticipated demand

What is included in the set up cost?

Hiring, training, and firing costs

What is the purpose of ABC analysis?

To classify inventory items into three categories namely A, B, and C

What is the main purpose of carrying inventory in case of seasonal fluctuations in demand?

To absorb variations in demand and production

What is the classification of inventory items based on their criticality in VED analysis?

Vital, Essential, and Desirable

What is the main difficulty in determining the procurement cost?

Difficulty in distinguishing between fixed and variable costs

What is the purpose of carrying inventory in case of production scheduling?

To provide a buffer between production processes

What is the classification of inventory items based on their price and quantity in ABC analysis?

High-priced and low quantity, moderate-priced and moderate quantity, and low-priced and high quantity

What is the primary purpose of FSN analysis in inventory control?

To control obsolescence by classifying inventory into three categories

Which category of items in the XYZ analysis requires close monitoring and tight control?

X class items

What is the primary characteristic of a static model in production planning and control?

It provides a snapshot of the production system at a particular point in time

What is the main difference between vital and essential items in inventory management?

Vital items are required for production activities, while essential items have a high stock-out cost

What is an example of a static model application in production planning?

Creating a production schedule for a fixed period by optimizing resource allocation

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

They are not suitable for addressing scenarios where the production environment is subject to significant variations

What is the main purpose of a static model in production planning and control?

To provide a snapshot of the production system at a particular point in time

What is the primary difference between desirable and essential items in inventory management?

Desirable items cause a minor disruption, while essential items have a high stock-out cost

What is the primary goal of incremental analysis in decision-making?

To compare the costs and revenues of different production scenarios

What is the main objective of calculating incremental costs and revenues in incremental analysis?

To compare the costs and revenues of different production scenarios

Which of the following is a key consideration in managing the cost of risk in production planning and control?

Assessing and managing uncertainties and potential disruptions

What is the primary purpose of decision criteria in production planning and control?

To guide decision-making in an environment of uncertainty

Which of the following decision criteria is concerned with the ability to adapt and change production plans quickly?

Flexibility

What is the main objective of scenario analysis in decision-making?

To make informed decisions based on a range of possible outcomes

Which of the following is NOT a step in incremental analysis?

Determine the optimal production level

What is the main benefit of effectively managing the cost of risk in production planning and control?

Maintaining a competitive edge and optimizing overall business performance

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

This quiz covers the definition and importance of inventory in production planning and control. It includes the different stages of inventory, such as materials, components, work-in-progress, and finished goods. Learn about the role of inventory in supporting production activities and ensuring a smooth supply chain.

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