Answers to Discussion and Review Questions
1. Inventories are held (1) to take advantage of price discounts, (2) to take advantage of economic lot sizes, (3) to provide a certain level of customer service, and (4) because production requires some in-process inventory.
2. Effective inventory management requires (1) cost information, information on demand and lead time (amounts and variabilities), an accounting system, and a priority system (e.g., A-B-C).
3. Carrying or holding costs include interest, security, warehousing, obsolescence, and so on. Procurement costs relate to determining how much is needed, vendor analysis, inspection of receipts and movement to temporary storage, and typing up invoices. Shortage costs refer to opportunity costs incurred through failure to make a sale due to lack of inventory. Excess costs refer to having too much inventory on hand. 4. The RFID (Radio Frequency Identification) chip tags are beginning to be used with consumer products and they contain bits of data, such as product serial number. Scanners will automatically read the information on an RFID chip into a database, so the companies can keep track of sales and inventory. Keeping track of inventory will enable suppliers to keep track of trends and react to market changes. In addition, RFID chips will assist in increasing the speed of communication on a supply chain. The information between parties will travel faster, which will improve the responsiveness of buyers and ordering information on the supply chain. The risk of using RFID chip tags stems from privacy concerns. It is feared that computer pirates will figure out security controls and be able to scan shoppers’ merchandise and determine what they have bought. In order to avoid this risk, companies are considering turning of RFID tags once the items are purchased.
5. It may be inappropriate to compare the inventory turnover ratios of companies in different industries