Inventory Management-1


SKU: AMSEQ-139 Category:

Assignment A

1. Do organizations need to carry inventory? Why?

2. What is the relationship between inventory investment and profitability of an organization?

3. Identify at least four alternatives that organizations use as a basis for fixing the order quantity?

4. What is the basis for service level and safety stock?

5. Why organizations adopt a selective system of inventory control?

Assignment B


1. Consider the inventory planning problem. Write down the relevant total cost equation in each of the following –

a. The organization can fetch discount on price if large quantities are ordered.

b. There is a benefit in transportation cost if ordered in full truckloads.

2. When is it appropriate to use the ABC classification and FSN classification schemes

3. Discuss and write two dimensional scheme of classification using ABC and VED


Q4. Case study: Please read the case study given below and answer questions given at the end.















Number of inventory turns of various sectors of Industries in India is as follows

Sector of Industry

FY 2002




Automobile: LCV/HCV





Automobile: Passenger Car










Computer hardware





Engineering: General





Engineering: Heavy




















Av No of Turns





Av Inventory ( Days)





Inventory Management is an important aspect for organizations for a variety of reasons. The foremost reason is the continued dominance of material cost in the total cost of a manufactured product. During 1998-99, brakes India spent about Rs 166 crores in purchase of materials, which accounted nearly 55 percent of goods sold during the year. Hence, proper material planning and control will offer good scope for cost reduction.

Secondly, investment in inventory continues to a significant portion of current assets in our country. As shown in the table above, on an average, Indian organizations carry in excess of 50 days of inventory. This is very high considering the international standards, which is in the range of 15-20 days of inventory.

On the other hand, some of the best managed companies in our country report high inventory turn. For example, Lucas TVS, Chennai –based auto-electrical manufacturer, reported about 30 inventory turns indicating merely12 days of inventory. The higher the inventory is, higher the total investment (due to increase in the current assets) and lower the retained earnings ( due to higher interest charges on the working capital ) will be . Therefore, inventory investment has a direct multiplier effect on ROI. The higher the investment in inventory, the lower the ROI will be.

Go through the case and answer the questions given below-

Q1. What are the practical reasons which attribute to high levels of inventory?

Q2 Give certain suggestions or specific techniques to overcome the problem.

Assignment C

1. Types of inventories are-

a) Cyclic stock

b) Pipeline inventory

c) Safety stock

d) All of these

2. Cost of ordering is-

a) Stationary cost for Purchase order

b) Man hours to issue PO

c) Expenses on account of tendering action

d) All of these

3. Carrying cost is-

a) Transport cost

b) Space occupied cost

c) Interest cost on stock value

d) Both a. & b.

4. Cost of stock out is –

a) Loss of production when material is not there

b) Stock of finished goods is zero

c) Pile up on shop floor

5. Inventory management is for-

a) Creating stock out

b) Balancing various types of costs

c) Making losses

d) All the above

6. A class item is-

a) Having highest stock

b) Having highest value

c) Having lowest value

d) None of the above

7. C class items constitute-

a) 70% of the items in number

b) 10% of the items in number

c) 30% of the items in number

d) None

8. VED stands for-

a) Variable, Exact & Double

b) Vital, Essential & Desirable

c) Value, Efficiency & Direct

d) None of the above

9. EOQ stands for-

a) Equal basis of quantity

b) Economic order quantity

c) Economy on quotient

d) None of these

10. XYZ is a category of materials based on-

a) Urgency

b) Frequency

c) Weight

d) All of these

11. Reorder level is the point where-

a) Stock is nil

b) Safety stock level

c) Service level

d) None

12. Expenses on preservation are-

a) Carrying cost

b) Ordering cost

c) Obsolescence cost

d) None

13. Ordering cost will be in the case of-

a) Imported material

b) Indigenous material

c) Local purchase

d) None

14. Pipe line inventory is-

a) Stock in finished god own

b) Raw material on shop floor

c) Scrap near the machine

d) None

15. Seasonal inventories varies-

a) On daily basis

b) Monthly basis

c) Season basis

d) None

16. Average inventories in days is-

a) Stock piled up in stores

b) Finished one

c) Both a& b

d) None

17. Inventory term stands for-

a) Idle resource for future use

b) Active resource

c) Non value resource

18. High inventory levels have effect on profitability of a firm-

a) Positive

b) Negative

c) No effect

d) None

19. Firms are trying to keep inventory lvels-

a) Very high

b) Moderate

c) Very low

d) None

20. Inventory management helps in-

a) Reduce wastages

b) Reduce obsolescence

c) Improve quality

d) None


21. Operating inventories are-

a )Min to run production

b) For final dispatch

c) Both of these

d) None

22. Timing of demand stands for-

a) Product is seasonally required

b) Product is always required

c) Both a& b

d) None

23. Good inventory management is-

a) Replenish the item the moment it is consumed

b) Replenish after one day

c) Both a& b

d) None

24. Insurance charge, when material is in transit is-

a) Carrying cost

b) Ordering cost

c) Obsolescence cost

d) None

25. If level of inventory is high-

a) Ordering cost will be minimum

b) Carrying cost will be Highest

c) Both b & c

d) None

26. Price discount for large order will-

a) Decrease ordering cost

b) Increase carrying cost

c) Both b & c

d) None

27. Instantaneous replenishment will create-

a) Zero carrying cost

b) Very high carrying cost

d) Moderate carrying cost

d) None

28. Continuous review of inventory is-

a) Two bin system

b) One bin system

c) Both a& b


29. Periodic review system is-

a) Daily basis

b) After a certain period

c)after one year

d) None

30. EOQ balances-

Inventory carrying cost

b) Inventory ordering cost

c) a & b

d)Obsolescence cost

31. ABC stands for-

a) Always better control

b) 80% value & 20% number

c) Both a & b


32. ABC & VED combination gives –

a) 9 categories for control

b) 6 categories

c) 3 categories

d) None of these

33. Safety stock is-

a)Saves the production

b) Ensures the continuity of production

c) both a & b

d) None

34. Lead time is –

a) Time taken for material receipt

b) Time between placement of order & receiving the material

c) Both a & b

d) None

35. Spares parts inventory is-

a) Cyclic in nature

b) Fixed

c) Continuous

d) None

36. Non moving items are-

a) Not in use for a long

b) Not shifted from one place

c) Both a & b

d) None

37. Slow moving items are-

a) Moving with a speed of 40 Km /Hr

b) Infrequent use

c) Regular in use

d) None

38. A type of items are-

a) Very high in value and less in number

b) Very important

c) Least important

d) None

39. JIT stands for-

a)Joint inspection & testing

b) Just in time

c) Both a & b

d) None

40. Standardization of items helps in controlling –

a) Variety of components

b) Number of components

c) Both a & b

d) None