Lesson 6 Assessment – 25 Marks

Submitted by: Anjo Princy

N01356152

True/False (10 marks)

1. Inventory management is not as important as it has been due to other factors coming
into play. False
2. “Batching stocks” and “cycle stocks” are the same. True
3. Purchase economies and transportation economies are not complementary. False
4. Setting safety stock levels for an organization is now a science. False
5. A reason to hold inventory arises when an organization anticipates that an unusual event
might occur that will negatively impact its source of supply. True
6. Capital cost is also called interest or opportunity cost. True
7. Ordering cost refers to the expense of placing an order for additional inventory and does
not include the cost or expense of the product itself. True
8. EOQ can only be used for “push” inventory. False
9. JIT is often used to force inventory back up the pipeline and therefore does not reduce
inventory. False
10. The ABC analysis is based on Pareto’s Law. True

Short Answer (15 marks)

The two major concepts of inventory management are EOQ and JIT. They involve assumptions
that are quite different. Explain in detail each theory along with its over arching assumptions.
What applications are suited best for each inventory management module?

Economic order quantity (EOQ) is the best ideal quantity that should be ordered by an
organization in order to minimize the inventory costs, holding costs, shortage costs, and other
order costs.
Under the EOQ model, there are a number of assumptions made which are continuous,
constant, and known rate of demand; constant and known replenishment or lead time; all
demand is satisfied; constant price or cost that is independent of the order quantity (i.e., no
quantity discounts); no inventory in transit; one item of inventory or no interaction between
items; infinite planning horizon and unlimited capital.

Another generally used approaches to inventory management is the just-in-time

Approach which is developed to manage the lead time of the activity and reduce and eliminate
waste as much as possible. This approach basically, as the name suggests, that inventories
should be made available to the organization when it needs them and not earlier or later.
According to this approach, the product should ideally arrive in the organization at the exact
moment of time it needs it and not before that or after that. Therefore, it doesn’t tolerate early or
late deliveries and prioritizes short and consistently reduced lead times by adhering itself to
shorter lead times cycles and very small lot sizes.

By delivering the products or materials in the right time and exact amounts, it helps in
minimizing the inventory costs and also minimize waste.

There are four major element that determine the Just- In- Time approach which are zero
inventories, short and consistent lead time, small and frequent replenishment quantities and
lastly, high quality and zero defects. According to these elements, adhering to the just- in- time
approach, the organization should be able to minimize waste and evolve the way any
organization perform its functions of logistics.

JIT approach can be best applied to the manufacturing organization because, since they require
raw materials from time to time, the movement of the raw materials for the organization from
one place or work station to another can be significantly reduced.

EOQ can be used in an environment where the demand for the products are fairly constant like
the grocery industry which is the essential needs industry and therefore, can use the Economic
order quantity to order the amount which is ideally required and to also keep the costs in tact.