Inventory Management: EOQ, Reorder Level, ABC/VED Analysis, JIT and Inventory Control Systems Questions

Question 1

What is EOQ?

Accepted Answer

**EOQ (Economic Order Quantity)** is the order quantity that minimizes total inventory cost (ordering cost + carrying cost).

Question 2

Define inventory.

Accepted Answer

**Inventory** is the stock of raw materials, WIP, finished goods and spares kept by an organization for production and sales.

Question 3

What is reorder level?

Accepted Answer

**Reorder level** is the inventory level at which a new order should be placed so that stock arrives before inventory becomes zero.

Question 4

What is safety stock?

Accepted Answer

**Safety stock** is extra inventory kept to handle uncertainty in demand or lead time and to avoid stock-outs.

Question 5

What is ABC analysis?

Accepted Answer

**ABC analysis** classifies inventory items based on **annual consumption value** into A, B and C classes for control priority.

Question 6

What is JIT?

Accepted Answer

**JIT (Just-In-Time)** is an inventory/production system that aims to receive materials and produce goods **just when needed**, keeping inventory minimum.

Question 7

Explain objectives of inventory management (any four).

Accepted Answer

Objectives of inventory management (any four):

- ensure **continuous production** by avoiding stock-outs of materials.
- meet customer demand on time and improve service level.
- maintain **optimum inventory** to minimize total cost.
- reduce wastage, deterioration and obsolescence.
- manage working capital effectively and avoid blocking funds.

Thus, inventory management balances availability with cost control.

Question 8

Explain inventory costs: ordering, carrying and shortage costs (brief).

Accepted Answer

Inventory costs:

- **Ordering cost**: cost per order such as paperwork, transport, receiving and inspection.
- **Carrying (holding) cost**: cost of storing inventory such as warehouse rent, insurance, interest on capital, deterioration and obsolescence.
- **Shortage cost**: cost of running out of stock such as production stoppage, emergency purchase, lost sales and loss of goodwill.

Hence, EOQ and reorder decisions aim to balance these costs.

Question 9

Explain EOQ model assumptions and write EOQ formula (any three assumptions).

Accepted Answer

### **EOQ Model (Basic)**

Assumptions (any three):
- **demand is known and constant**.
- **lead time is constant**.
- **no stock-outs** are allowed.
- ordering cost per order and holding cost per unit are constant.
- replenishment is instantaneous.

EOQ formula:
- **EOQ = sqrt(2DS / H)**
Where D = annual demand, S = ordering cost per order, H = holding cost per unit per year.

Thus, EOQ gives the order size that minimizes ordering + carrying cost.

Question 10

Explain reorder level and safety stock (any three points) with a simple flow.

Accepted Answer

**Reorder level** indicates when to place the next order.

Key points (any three):
- reorder level is based on **demand during lead time**.
- **safety stock** is added to protect against uncertainty.
- when stock reaches reorder level, an order is placed so that delivery arrives before stock-out.

Flow:

```text
Stock decreases → reaches Reorder Level → place order → lead time passes → stock replenished
```

Thus, reorder level + safety stock reduce stock-out risk and improve service level.

Question 11

Explain ABC analysis and its control policy (any three points) with a table.

Accepted Answer

### **ABC Analysis**

ABC analysis is based on **annual consumption value** (unit cost × annual usage).

Control policy (any three points):
- **A items**: few items but high value → strict control, frequent review, accurate records.
- **B items**: moderate value → normal control.
- **C items**: many items but low value → simple control, bulk ordering.

Table:

| Class | Value share | Control intensity |
|---|---|---|
| **A** | high | very strict |
| **B** | medium | moderate |
| **C** | low | simple |

Thus, ABC focuses managerial attention on the “important few” items.

Question 12

Explain VED analysis and its importance for spare parts control (any three points).

Accepted Answer

### **VED Analysis**

VED classifies items based on **criticality**:
- **V (Vital)**: must be available; shortage can stop production.
- **E (Essential)**: shortage affects performance but not immediate stoppage.
- **D (Desirable)**: shortage can be tolerated for some time.

Importance (any three):
- helps prioritize spares that can cause **downtime** if unavailable.
- improves maintenance planning and reduces production stoppage.
- supports better service level with optimum investment in spares.

Thus, VED is very useful for maintenance spares and critical components.

Question 13

Explain JIT inventory system: features, benefits and limitations (exam-style with table).

Accepted Answer

### **JIT (Just-In-Time) Inventory System — Exam-Style**

**Meaning:** JIT aims to receive materials and produce goods **just when needed**, keeping inventory at minimum.

#### **Features**
- small lot sizes and frequent deliveries
- strong supplier relationships
- high quality (zero defects mindset)
- smooth flow and pull-based production

#### **Benefits**
- carrying cost and inventory investment **reduce**
- defects and waste reduce; quality improves
- shorter lead time and faster response

#### **Limitations**
- high risk of stoppage if supplier/transport fails
- needs reliable suppliers and stable processes
- difficult when demand is highly uncertain

Table:

| Area | JIT impact |
|---|---|
| Inventory | minimum stock |
| Quality | high requirement |
| Risk | higher disruption risk |

**Conclusion:** JIT improves efficiency but requires strong coordination, quality and reliability across the supply chain.

Question 14

Explain ABC–VED matrix and how it helps prioritize inventory control (exam-style with a simple matrix).

Accepted Answer

### **ABC–VED Matrix (Priority Control) — Exam-Style**

ABC focuses on **value**, while VED focuses on **criticality**. Combining them helps decide where strict control is needed.

Simple matrix (concept):

```text
           V (Vital)   E (Essential)   D (Desirable)
A (High)      AV           AE              AD
B (Med)       BV           BE              BD
C (Low)       CV           CE              CD
```

How it helps:
- **AV, AE, BV**: very high priority (critical and/or high value) → strict control, accurate records.
- **CV, CE**: moderate priority.
- **CD**: low priority → simple control.

**Conclusion:** ABC–VED matrix ensures attention is given to items that are both **expensive** and **critical**, improving service level while controlling inventory investment.

Question 15

Explain EOQ with a simple numerical illustration and show cost trade-off (exam-style).

Accepted Answer

### **EOQ: Numerical Illustration and Cost Trade-off (Exam-Style)**

Given:
- Annual demand (D) = 10,000 units
- Ordering cost per order (S) = Rs. 200
- Holding cost per unit per year (H) = Rs. 5

EOQ = sqrt(2DS / H)
= sqrt(2 × 10,000 × 200 / 5)
= sqrt(800,000)
≈ 894 units (approx)

Meaning of trade-off:
- If order quantity is **small**, number of orders increases → **ordering cost** increases.
- If order quantity is **large**, average inventory increases → **carrying cost** increases.
- EOQ is the quantity where total of ordering + carrying cost is minimum.

Mini table:

| Order size | Ordering cost | Carrying cost |
|---|---|---|
| Small | high | low |
| Large | low | high |

**Conclusion:** EOQ helps decide an economic order size by balancing ordering and carrying costs.

Inventory Management: EOQ, Reorder Level, ABC/VED Analysis, JIT and Inventory Control Systems

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