Master of International Business
CHAPTER 9: INVENTORY MANAGEMENT 1. What is inventory turnover? How can a high inventory turnover ratio be detrimental to a firm?
Inventory turnover refers to the number of times that inventory is sold in a one year period. It can be calculated by dividing the cost of goods sold for a particular period by the average inventory for that period. High inventory turnover may signal a low level of inventories, which can increase the chance of product stockouts. 2. Distinguish among cycle, safety, pipeline, and speculative stock.
Cycle (base) stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle. Safety (buffer) stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. Pipeline (in-transit) stock is inventory that is en route between various nodes in a logistics system, while speculative stock is inventory that is held for several reasons to include seasonal demand, projected price increases, and potential product shortages. 3. Define what is meant by inventory carrying costs. What are some of its main components?
Inventory carrying costs refer to the costs associated with holding inventory. Inventory carrying costs consist of a number of different components, and their importance can vary from product to product. These components include obsolescence costs, shrinkage costs, storage costs, taxes, and interest costs. 4. Discuss the concept of stockout costs. How can a stockout cost be calculated?
Stockouts refer to situations where customers demand items that are not immediately available and stockout costs refer to the costs associated with not having items available. Calculation of a stockout cost first requires a company to classify potential customer responses to a stockout (e.g., delays the purchase, lost sale, lost customer). Next, the company needs to assign probabilities to the various responses as well as to assign
Inventory turnover refers to the number of times that inventory is sold in a one year period. It can be calculated by dividing the cost of goods sold for a particular period by the average inventory for that period. High inventory turnover may signal a low level of inventories, which can increase the chance of product stockouts. 2. Distinguish among cycle, safety, pipeline, and speculative stock.
Cycle (base) stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle. Safety (buffer) stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. Pipeline (in-transit) stock is inventory that is en route between various nodes in a logistics system, while speculative stock is inventory that is held for several reasons to include seasonal demand, projected price increases, and potential product shortages. 3. Define what is meant by inventory carrying costs. What are some of its main components?
Inventory carrying costs refer to the costs associated with holding inventory. Inventory carrying costs consist of a number of different components, and their importance can vary from product to product. These components include obsolescence costs, shrinkage costs, storage costs, taxes, and interest costs. 4. Discuss the concept of stockout costs. How can a stockout cost be calculated?
Stockouts refer to situations where customers demand items that are not immediately available and stockout costs refer to the costs associated with not having items available. Calculation of a stockout cost first requires a company to classify potential customer responses to a stockout (e.g., delays the purchase, lost sale, lost customer). Next, the company needs to assign probabilities to the various responses as well as to assign