Question

Using the definitions and material found in Chapter 6 of Quantitative Analysis, the Internet, and your own personal experiences, make notes on following items in detail

1. Why is inventory an important consideration for managers?
2. What is the purpose of inventory control?
3. Why wouldn’t a company always store large quantities of inventory to eliminate shortages and stockouts?
4. Briefly describe what is meant by ABC analysis. What is the purpose of this inventory technique?
5. Respond to two other class member postings, noting questions and mutual interests.

PLEASE TYPE OUT THE ANSWERS

Answer 1

1. The sources for maintaining the inventory are the internal funds ( capital etc.) or the external borrowings. Each such source has a cost attached to it. Therefore, there are substantial costs involved in maintaining inventory. Therefore, inventory management is an important consideration for managers.

2. The purpose of inventory control is to control financial costs associated with running a business.

3. A company need always store large quantities of inventory to eliminate shortages and stockouts as there are financial costs associated with maintaining inventory. The inventory may be easily managed by ordering the economic order quantity (EOQ) or the minimum order quantity(MOQ) (of all the inventory items) whichever is higher.

4. As per the Pareto Principle for Inventory Management , 80% of the sales value is derived from 20% of the stock items. The ABC Analysis of Inventory Management works on this principle and prescribes the following basis for classification and management of inventory.

Category A forms 15% to 20% of the stock quantity but commands 80% to 85% of the value.

Category B forms 30% to 35% of the stock quantity but commands 10% to 15% of the value.

Category C forms 50% of the stock in terms of quantity but commands only 55 of the value.

It may be observed that Category A items, which account for only a small portion of the inventory, are the high value items in terms of the revenue these bring. The Category B items are mid-range items which consist of a relatively larger share of the physical inventory ,but their value is lesser when compared to the contribution of Category A items to the revenue. The Category C items form a large part of relatively small valued items which are necessary for conducting the business smoothly. However, their contribution to the revenue is very little.