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Unit 2 - Inventory control :star: - Coggle Diagram
Unit 2 - Inventory control
:star:
Interpretation of inventory control diagram
Re-order level -The level of stock which triggers and order, this may be done automatically by a computerised system. The re-order level will be determined by both the lead time and the minimum stock level.
Buffer stock level of stock - Stock held by a business to cope with unforeseen circumstance e.g. sudden increase in demand, break down in supplies. When a business reaches its minimum stock level it is left just with buffer stock. A business operating JIT system will have zero buffer stock
Lead time - The time it takes between placing an order and receiving delivery. The GREATER the lead time, the HIGHER the minimum stock level.
Re-order quantities - The point at which an order for new stock is placed, this will be dependent on buffer level of stock and lead time. A computerised stock control system will automate this process so that when stock reaches this level, an order is automatically sent to a supplier.
Buffer inventory
= stocks held as precaution to cope with unforeseen demand
:check:If lead time is not always consistent due to supplier unreliability, then the business can dip into the buffer stock while waiting for delayed delievery
:red_cross:Large stock holdings are costly making fixed costs larger e.g. storage, money tied up in working capital
:check:Helps when demand increases unexpectedley, business can dip into buffer stock rather than running out of stock and losing customers to competitors.
:red_cross:Larger risk of stock obsolescence, especially if the business solely produces products that are perishable (e.g. fruit)
:check:Potential for lower unit costs by ordering in bulk/high quantities
JIT
=a technique used to minimize stock holdings at each stage of the production process, helping to minimise costs
:check: cost of stockholding is reduced significantly
:red_cross: advantages of bulk buying may be lost
:check: improves cash flow as money is not tied up in stock
:red_cross: difficult to cope with sudden increase in demand, possible loss of reputation if customers are let down by late deleveries
Implications of poor inventory control
Holding too much inventory
:
spoilage cost- the quality of some inventory may deteriorate over time.
opportunity cost - capital tied up in inventory earns no rewards. The money used to purchase inventory could be used for new machinery
unsold inventories -the firms may be left with inventory that can't be sold
Holding too little inventory
:
the business may not be able to cope with unexpected increases in demand
A firms which holds very low inventory may have to place more orders. This will raise total ordering costs. It might also miss out on discounts from bulk-buying
if inventories run out they may have to stop production which leads to inactive labour and machinery
Waste minimization
if goods are perishable they might be placed in chilled storage.
computerized systems are programmed to automatically order inventory when the re-order level is reached
if inventory remains high as the 'sell-by-date- approaches, prices might be reduced to encourage purchases
Competitive advantage from lean production ( aims to use fewer resources in production such as kaizen, multis killing to minimize waste)
=
less inventory
resource use will lower production costs
-raises productivity
lowers the number of faulty products