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Chapter 24 - Inventory Management - Coggle Diagram
Chapter 24 - Inventory Management
Inventory Type
Work in progress
Bread dough
Finished Goods
Loaf of Bread
Raw Materials and Components
Flour
Inventory Holding Costs
Storage Costs
Costs such as warehouse costs, rent, wages, insurance, finance costs
Risk of wastage and obsolescence
If not sold, old inventories may start to deteriorate or become outdated, lowering its value
Opportunity Cost
Working Capital is tied up, could have been used for other things
Just In Time Requirements
Accurate demand forecasts
Keeping zero and low levels of goods and stocks is risky
Latest IT equipment
Data-based records of sales, sales trends, reorder levels, contact with supplier
Equipment and machinery must be flexible
Able to produce in small batches of wide goods, cheap
Excellent employee-employer relationship
Problems and disputes could occur
Production staff must be multiskilled and prepared to change jobs at short notice
Change jobs to produce other goods so that no excess resources are left
Quality must be everyone's priority
no spare inventories to fall back on
Excellent relationship with supplier
Reliable, short lead time
Controlling Inventory Levels
Re-order quantity
The number of units ordered each time
Lead time
The normal time taken between ordering new stocks and their delivery
Buffer inventories
The minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or production rates increase
Re-order stock level
The level of stocks that will trigger a re-order to the supplier
Maximum inventory level
Limited by space and capacity of warehouse and financial costs
Picture of Graph
Costs of Not Holding Enough Inventory
Lost Sales
If customer's demand cannot be met, customers may switch to competitors for service. Lost future sales. Penalty clause
Idle production resources
Production will stop if raw materials and components run out, this will make production of each unit more expensive. Lost output
Special orders could be expensive
Urgent request to supplier for delivery goods may incur higher costs
Small order quantities
Lose out on bulk discounts and transport costs would be higher
Advantages and Disadvantages of JIT
Advantages
Less chance of inventories becoming outdated
Greater flexibility that the system demands leads to quicker response time to changes in consumer demand or tastes
Cost of storage is reduced
multi-skilled and adaptable staff may gain work motivation
Capital invested in inventory is reduced, reducing opportunity costs
Disadvantages
Order administration costs may rise because so many small orders need to be processed
There could be a reduction in bulk discounts
Delivery costs will increase
Reputation of the business depends significantly on outside factors such as reliability of suppliers
Any failure or late delivery os supplies may cause internal and external problems