Inventory Management-1A


SKU: AMSEQ-140 Category:


Assignment A consists of five questions. Please attempt all five.

1) Define inventory and list types of inventories. How does inventory contribute to the value adding activities of a firm? When should inventory be considered a symptom of waste?

2) Explain what do you understand by E.O.Q.? What are the assumptions of the EOQ model? How sensitive is EOQ to variations in demand or costs?

3) First-in, first-out; weighted average; and last-in, first-out methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

4) Write notes on the following:

a) ABC analysis.

b) Distribution Resource Planning.

c) Application of IT in inventory management.

d) Inventory turns and productivity.

5) Taking an example of a white good manufacturing organization explain the measures you would use to determine inventory performance.







Assignment B

Assignment B consists of three questions and a case study followed by relevant question. Please attempt all.

1) In what ways are the inventory accounts of a retailing concern different from those of a manufacturing enterprise? Of what significance is inventory turnover to a retail store?

2) Explain the meaning of transit stock, cycle stock and anticipation stocks. Discuss means to reduce anyone of them.

3) Outline an approach to improve inventory turnover ratio for an organization engaged in manufacturing a large number of standard products involving machining and assembly operations.

Case Study: Toyota’s JIT Revolution: A Legendary Production System

In the mid-1990s, more than fifty executives and engineers from major automobile companies worldwide visited Toyota Motor Company’s (Toyota) manufacturing complex at Georgetown, US, to study the Toyota Production System (TPS). The visit also included an intensive question and answer session. Even though the visitors were from competing automakers, including Ford and Chrysler, Toyota did not deny them access to the plant.

The TPS aimed to produce world-class, quality automobiles at competitive prices. It was built on two main principles, Just-in-Time (JIT) production and Jidoka. JIT was used not only in manufacturing but also in product development, supplier relations and distribution. Analysts remarked that despite imitating Toyota’s JIT for many years, no other automaker in the world had been able to make their production systems and processes as efficient as Toyota had done. Analysts felt that though other leading automakers like Mercedes-Benz, Honda and DaimlerChrysler excelled in advanced engineering techniques, engine technology and styling, they did not match Toyota in efficiency, productivity and quality.

Executives of rival companies also appreciated Toyota’s manufacturing and product development systems. Officials at GM commented, “Toyota is the benchmark in manufacturing and product development.” A top executive at Ford said, “Toyota is far ahead in developing markets that the real race is for the second place.” Some executives at BMW also considered Toyota the best car company in the world.

The early adoption of JIT principles by Toyota seemed to have helped the company achieve significant success. It helped the company respond quickly to changing customer needs and offer high quality products at low costs, thus increasing customer satisfaction.

Background Note

Toyota’s history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the handloom machinery business from his family traditional business of carpentry. He founded Toyoda Automatic Loom Works (TALW) in 1926 for manufacturing automatic looms. Sakichi invented a loom that stopped automatically when any of the threads snapped. This concept of designing equipment to stop so that defects could be fixed immediately formed the basis of the Toyota Production System (TPS) that went on to become a major factor in the company’s success.

In 1933, Sakichi established an automobile department within TALW and the first passenger car prototype was developed in 1935. Sakichi’s son Kiichiro Toyoda (Kiichiro) convinced him to enter the automobile business. After this the production of Model AA began and Toyota Motor Corporation was established in 1937. Kiichiro visited the Ford Motor Company in Detroit to study the US automotive industry. He saw that an average US worker’s production was nine times that of a Japanese worker. He realized that the productivity of the Japanese automobile industry had to be increased if it were to compete globally.

Back in Japan, he customized the Ford production system to suit Japanese market. He also devised a system wherein each process in the assembly line of production would produce only the number of parts needed at the next step on the production line, which made logistics management easier as material was procured according to consumption. This system was referred to as Just-in-Time (JIT) within the Toyota Group.

The JIT production was defined as ‘producing only necessary units in a necessary quantity at a necessary time resulting in decreased excess inventories and excess workforce, thereby increasing productivity.’ Kiichiro realized that by relying solely on the central planning approach, it would be very difficult to implement JIT in all the processes for an automobile. Hence, TPS followed the production flow conversely. People working in one process went to the preceding one to withdraw the necessary units in the necessary quantities at the necessary time. This resulted in the preceding process producing only quantities of units to replace those that had been withdrawn.

Toyota flourished during the Second World War by selling trucks and buses to the army and the company launched its first small car (SA Model) in 1947. After the war, the company faced a series of financial problems. A financial support package from a consortium of banks (after the intervention of the Bank of Japan) helped Toyota tide over its problems. The package consisted of a series of steps that included downsizing and restructuring the company into separate manufacturing and sales divisions. As per the revival package, The Toyota Motor Sales Company Ltd. was formed in 1950. In the same year, Kiichiro resigned.

By 1952, Toyota made a turnaround and in 1953, the company appointed distributors in El Salvador and Saudi Arabia and started exports. Meanwhile, Taiichi Ohno (Ohno) took charge of the company. In 1957, Toyota entered the US market through its subsidiary, Toyota Motor Sales, USA. In 1959, the company began its first overseas production in Brazil and over the next few years, developed a vast network of overseas plants. Besides manufacturing, Toyota started a global network of design and Research and Development facilities covering the three major car markets of Japan, North America and Europe.

By the early 1970s, Toyota’s sales exceeded that of Chrysler and Volkswagen and its production was behind that of only General Motors (GM) and Ford. Toyota continued its efforts to make its production system more efficient and also developed flexible manufacturing systems. It also began to tap the markets in the Middle East and by 1974 the Toyota Corolla, (launched in 1965) became the largest selling car in the world. In 1984, Toyota entered into a joint venture with GM and established the New United Motor Manufacturing Inc. (NUMMI).

By the early 1990s, as Toyota expanded its overseas operations, the excessive capital spending affected its profit margins. Tatsuro Toyoda (Tatsuro), who took over as the company President in 1992, began to control costs by eliminating all unnecessary expenditure. In 1995, after Tatsuro resigned due to health reasons, Hiroshi Okuda (Okuda) became Toyota president. In 1996, Toyota consolidated its production in North American production units into the Cincinnati based Toyota Motor Manufacturing (North America).

In 1999, Okuda replaced chairman Shoichiro Toyoda and Fujio Cho (Cho) became the president. In the same year, Toyota listed its shares on both the New York and London stock exchanges. By the end of 2001, the company’s net income had reached $5,447 million and net revenue reached $106,030 million (Refer Exhibit I for the company’s financial performance over the years).

According to analysts, Toyota’s success in both the local and global markets was mainly because of its state-of-the-art and well-planned operational strategies. The company had continuously focused on gaining a competitive advantage through implementation of innovative and path-breaking ideas on its production floors. TPS worked on the basic idea of maintaining a continuous flow of products in factories in order to flexibly adapt to demand changes. The most important feature of TPS was the way it linked all production activities to real dealer demand through implementation of Kanban, JIT and other quality measures that enabled Toyota to manufacture in low quantities.

Just-In-Time Production System

Developed by the Japanese, the JIT production system was one of the most significant production management approaches of the post World War II era. The system comprised a set of activities aimed at increasing production volume through the optimum use of inventories of raw materials, work-in-process, and finished goods. In a JIT production system, a workstation gets a part just in time, completes its work and the part is moved through the system quickly.

JIT was based on the principle of producing only what is needed and nothing more than needed. The Japanese believed that anything produced over the quantity required was a waste. Cho defined waste as, “Anything other than the minimum amount of equipment, materials, parts and workers (working time) which are absolutely essential to production.” JIT did not allow any surplus as it believed that “effort and material expended for something not needed now cannot be utilized now.” (Refer Table I for requirements and assumptions of JIT).

Table I
Just-In-Time Production System

What it is
• Management philosophy
• ‘Pull’ System through the plant
What it does
• Attacks waste (time, inventory, scrap)
• Exposes problems and bottlenecks
• Achieves streamlined production
What it requires
• Employee participation
• Industrial engineering/basics
• Continuing improvement
• Total quality control
• Small lot sizes
What it assumes
• Stable environment

Source: Production and Operations Mgmt.:

Manufacturing and Services, Chase, Acquilano & Jacobs.


JIT could be applied to any manufacturing environment including job shop, batch production or repetitive production. The ideal lot size as per JIT was one. A worker had to complete one task and pass it on to the next workstation for further processing. If workstations were geographically far away, efforts were made to reduce the transit time.


The advantages of JIT included price flexibility, reduction in product variation, quick response to customers’ demands, high quality products at low cost for consumers, and above all, customer satisfaction. The system also offered the advantages of low inventory investment, shortened lead times, and early detection of quality problems.


JIT in Toyota


In the early 1930s, the technology used by American automobile companies was superior to that used by Japanese companies. Kiichiro therefore decided to learn new automobile production techniques from American manufacturers. He soon realized that to catch up with the Americans, he had to master basic production techniques. He then reorganized the production system in Toyota in a unique way. This reorganization eventually led to the development of JIT concept.


In the early 1970s, Taiichi Ohno (Ohno) implemented JIT in Toyota’s manufacturing plants. The JIT system was aimed at avoiding waste, reducing inventories and increasing production efficiency in order to maintain Toyota’s competitive edge. Ohno also believed that customers should receive high quality products in the shortest time. Initially, JIT was used as a method for reducing inventories in Toyota’s shipyards, but later it evolved into a management philosophy including a set of techniques.


Kanban was an essential component of Toyota’s JIT concept. The Japanese referred to Kanban as a simple parts-movement system that depended on cards and boxes/containers to take parts from one workstation to another on a production line. Ohno had developed the idea in 1956 from the super markets in the US, which had devised an effective system for replenishment of store shelves based on the quantities picked by the customers. Initially, Ohno used pieces of paper contained in rectangular vinyl envelopes to convey information (called Kanban). In a period spanning three decades, Kanban developed into a sophisticated information system that ensured production in required quantities at the right time in all manufacturing processes within the factory.


The essence of the Kanban concept was that a supplier delivered components to the production line only when required, thus eliminating storage in the production area. Suppliers delivered desired components when they received a card and an empty container, indicating that more parts were needed for production. In case of line interruption, each supplier produced only enough components to fill the container and then stopped. Since Kanban was a chain process in which orders flowed from one process to another, the production or delivery of components was ‘pulled’ to the production line (Refer Box).


In a pull system, the production of a certain product starts only when a demand or request is made by the buyer. The consumer of the product ‘pulls’ from the last link of the production chain. This last link pulls its preceding link and so on. In western companies, the push system was considered to be more cost-effective. Push systems were schedule-based projections of what demand was expected to be. Based on historical information (updated on a weekly or monthly basis), a computer program processed the information giving a detailed sub-schedule for buying materials and producing goods. This schedule pushed the production in order to comply with the expected demand. The disadvantage of the push system was that predictions did not always coincide with facts. This resulted in either excess or inadequate inventories.


In the traditional forecast oriented method, parts were ‘pushed’ to the line. At Toyota, two types of Kanban cards were used: one, to move parts from one place to another, known as the Conveyance Kanban card, and the other, to authorize the production of parts, known as the Production Kanban card. A standard size container was used to store parts and each card was treated like a coupon.


Suppose a container of item X is required in work centre A. As a first step, a production Kanban card is issued to work centre A. The work centre withdraws a container of raw materials from its inventory. The container of raw materials also included a conveyance Kanban card. Work centre A removes the conveyance Kanban card from the container and sends it to the proceeding work centre where it serves as an authorization to pick up a container of raw materials.


Three types of information were exchanged using Kanban. Pick up information guided the earlier stages regarding parts to be produced for the succeeding stages. Transfer information indicated when the parts had to be produced for the succeeding stages. Production information was transmitted from the earlier stages to the later stages to inform the workers about the product mix and other operational matters.


To make the Kanban system effective and reap maximum benefits (Refer Table II) from it, Ohno framed six rules:

  • Later process went to the earlier process to pick up products.
  • The earlier process produced only the amount withdrawn by the later process.
  • Should not pick or produce goods without a Kanban.
  • A Kanban should be attached to the goods.
  • 100% defect free parts were required.
  • Reduce the number of Kanbans.


Table II: Advantages of Kanban

1. A simple and understandable process

2. Provides quick and precise information

3. Low costs associated with the transfer of information

4. Provides quick response to changes

5. Limit of over-capacity in process

6. Avoids overproduction

7. Minimizes waste

8. Control can be maintained

9. Delegates’ responsibility to workers

Source: ICMR


The Kanban cards were re-circulated and the number of cards controlled work-in-progress (WIP) in the system. In this way, the activities of final assembly were linked to previous operations by a chain system of card ordering that ‘pulled’ production through the factory.


Another important component of JIT was Heijunka (production smoothing). JIT’s principle of building only the required number of items helped keep the production costs low. Heijunka helped in the accomplishment of this principle by creating a consistent production volume. Heijunka averaged the highest and lowest variations of the orders. The variations were then removed from the production schedule. This ensured that the right quantity of parts was produced with minimum workforce. Heijunka took care not only of the total volume of items but also the type of items produced and the other options.


Future of JIT


Although many automobile companies around the world adopted JIT, the system was far from perfect and difficult to implement. It was based on the key assumption that sources and channels of supply were reliable and dependable at all times. Analysts felt that it did not take into account the possibility of labor strikes at automotive plants. Moreover, JIT involved high set up costs and Special training and reorganization of policies and procedures in the company were necessary to implement JIT. The supplier relations of the company also needed to be improved to ensure timely delivery. In the absence of good supplier relations, JIT increased the risk of inventory shortage. Organizational culture also seemed to play a crucial role in the implementation of JIT. Many companies outside Japan reported difficulties in the implementation of the concept.


Another problem seemed to be the difficulty of removing the ‘human element’ from the systems that generate requirements.


An analyst commented, “Computer algorithms, they say, go only so far. Good people, with lengthy experience at reading the ups and downs of the industry are still a must.” Most companies felt that people should be actively involved in the system.


Moreover, there could be many barriers to the successful implementation of JIT. For JIT to be successful, companies had to ensure that they did not make frequent changes in production planning and that their forecasting procedures were reliable and did not result in under or over forecasting of demand. Other barriers could be equipment failure and employee absenteeism.


Analysts felt that Toyota’s JIT was a complicated process and that its success inside a plant depended mainly on highly experienced, highly motivated managers. Outside the plant, JIT’s success depended on a network of capable suppliers that operated in sync with Toyota’s production processes. In fact, according to some analysts, Toyota was not able to replicate the JIT production system in an efficient way in any of its operations outside Japan. John Paul MacDuffie said, “Toyota hasn’t developed a single facility that is as efficient as the ones it has in Japan.”


Although Toyota’s JIT had some drawbacks, it offered several advantages over other manufacturing processes. Because of the early adoption of JIT, Toyota benefited more from the system than other automobile companies.


By 2000, JIT was adopted by many Japanese companies, as well as some US car companies. Analysts felt that JIT was not only a process that could be applied to manufacturing, but also a philosophy that governed the attitude of a successful business. According to one analyst, “Using JIT, Taiichi Ohno had revolutionized production. The market clearly reflects the success of JIT. The concept has made Japanese products affordable and reliable in quality. Quality is no longer a privilege – it is a standard accompanied by low cost.”




  1. Explain in detail the concept of Just-in-Time production system? What are the main advantages of JIT?


  1. Discuss the relevant facts from the case and illustrate how operations strategy led to the success of Toyota Motor Corporation?


  1. Kanban was an essential component of Toyota’s JIT. Discuss the same. Discuss the six rules framed by Ohno to make the Kanban system effective.


  1. As per the case study, ‘Although many automobile companies around the world adopted JIT, the system was far from perfect and difficult to implement.’ Discuss the reasons for the same.



















Multiple Choice Questions

Instruction: Select the correct option out of the four options provided


1. Which of the following is NOT a function of inventory?

a)      meet anticipated customer demands

b)      smooth production requirements

c)      decouple operations

d)     they are all functions of inventory


2. When dealing with inventory, the Little’s Law is used for?

a)      counting inventory

b)      quantifying pipeline inventory

c)      preventing shortages in inventory

d)     all of the above


3. Which of the following are functions of inventory that management is concerned with?

a)      Make sure you never run out of inventory

b)      Make decisions about how much to order

c)      Make decisions about when to order

d)     both b and c


4. Which of the following best describes lead time?

a)      The time that sales are at a profit

b)      The time that the company is ahead of it’s competitors

c)      The time interval between submitting and receiving the order

d)     The time it takes to record items at time of sale


5. Which costs is associated with keeping items in inventory?

a)      Holding costs

b)      Ordering costs

c)      Shortage costs

d)     A and B


6) Which is the most commonly used measure of managerial performance.

a)      Capital structure

b)      ROI(return on investment)

c)      Demand

d)     Inventory costs


7) What are independent-demand items?

a)      Items that are ready to be sold and used

b)      Components of products rather than finished products

c)      Special order items

d)     Products that appeal to a certain demographic of customers


8) Which of the following is not a function of inventory?

a)      To meet anticipated customer demand

b)      To smooth production requirements

c)      To protect against stock-outs

d)     To know lead times and lead time variability


9) Which inventory counting system keeps track of removals from inventory on a continuous basis?

a)      Two-bin system

b)      Periodic system

c)      Perpetual system

d)     Operations system


10) The economic order quantity model (EOQ), identifies:

a)      Production of batch items or lots

b)      A constant usage rate

c)      Units received incrementally during production

d)     Fixed order size by minimizing the sum of annual costs of holding and ordering inventory.


11. Which of the following (is/are) types of inventory?

a)      Tools and Supplies

b)      Maintenance and Repair (MRO)

c)      Finished Goods

d)     all of the above are inventories


12. A perpetual Inventory system takes a physical count of inventory on which of the following intervals?

a)      Fixed intervals

b)      Annual intervals

c)      Periodic intervals

d)     A and B


13. When the amount on hand reaches a predetermined minimum, which inventory system orders a fixed quantity?

a)      Good organization

b)      Perpetual inventory

c)      Organized inventory

d)     Periodic inventory


14. Effective inventory management estimates all of the following costs except:

a)      Transaction cost

b)      Shortage cost

c)      Secretary cost

d)     Holding cost


15. The risk of stock-out increases as?

a)      The amount of safety stock increases

b)      The amount of safety stock decreases

c)      The amount of safety stock remains constant

d)     Safety stock has no effect on stock-out


16. Which of the following are NOT a part of the basic functions of inventory systems that management should be concerned with?

a)      what quantity will be ordered

b)      tracking existing inventory

c)      how inventory will be delivered

d)     when to order additional inventory


17. Which inventory system is the best method to prevent inventory theft/loss?

a)      Perpetual Inventory System

b)      Periodic Inventory System

c)      Both are equally good

d)     none of the above

18. Which of the following listed is/are function(s) of POS(point-of-sale) system?

a)      record actual sales electronically

b)      provide forecast of what items will most likely to attract customers and increase sales

c)      calculate sum of total sales

d)     Both a and b


19. Which one of these assumptions do NOT qualify to create an ideal situation to use the Basic EOQ Model?

a)      there are no quantity discount

b)      there is only one product involved

c)      demand requirements are unknown

d)     lead time does not vary


20. Which one of these factors is NOT a determinant of the reorder point?

a)      rate of demand

b)      acceptable stock-out risk level to management

c)      lead time variability

d)     All of above are determinants of reorder point.


21. “A physical count of items in inventory made at periodic intervals”, refers to _?

a)      periodic system

b)      perpetual inventory system

c)      two bin system

d)     universal product code


22. Which of the following is NOT a function of inventories?

a)      to meet anticipated customer demand

b)      to smooth production requirement

c)      to work more closer with suppliers to coordinate shipments

d)     to take advantage of order cycles


23. What is an inventory a stock or store of __________?

a)      ideas

b)      goods

c)      shipments

d)     networks


24. Which of the following is NOT an order size model?

a)      basic economic order quantity model

b)      economic production model

c)      quantity discount model

d)     single period model


25. Which is not a requirement for effective inventory management?

a)      a system to keep track of the inventory

b)      a reliable forecast of demand

c)      effective transportation analysis

d)     knowledge of lead times


26. Which of the following is a function of inventory?

a)      To smooth production requirements

b)      To meet anticipated customer demand

c)      Decouple operations

d)     All of the above

27. Which of the following (is/are) a result of a company’s failure to manage their inventory properly?

a)      Decline in Level of customer service

b)      Increase in ordering, carrying, and storage costs

c)      Stock-outs or overstock

d)     All of the above are results of improperly managing inventory


28. Little’s Law states:

a)      The average amount of inventory in a system is constant.

b)      The average amount of inventory in a system is equal to the product demand rate and time in the system.

c)      The average amount of inventory in a system is equal to last year’s forecast.

d)     The average amount of inventory cannot be predicted.


29. Which of the following is/are acceptable inventory counting systems?

a)      Perpetual

b)      Normal

c)      Periodic

d)     Both A and C


30. Which of the following is NOT a requirement for manager to effectively managing inventories?

a)      Income from operations must equal income from financing activities

b)      Have a reliable forecast of demand that include an indication of past forecast orders

c)      Know lead times and lead time variability

d)     Have a classification system for inventory items


31. What is generally true about the class A SKUs in ABC analysis? They represent:

a)      about 20 percent of all SKUs.

b)      about 30 percent of all SKUs.

c)      about 20 percent of the dollar usage.

d)     about 50 percent of the dollar usage.


32. What is generally true about the class C SKUs in ABC analysis? They represent:

a)      about 20 percent of all SKUs.

b)      about 50 percent of all SKUs.

c)      about 15 percent of the dollar usage.

d)     about 50 percent of the dollar usage.


33. ABC analysis is closely related to:

a)      three-bin analysis.

b)      EOQ analysis.

c)      repeatability analysis.

d)     Pareto analysis.


34. Which one of the following is NOT a method for tracking inventory and ensuring accurate records?

a)      Assigning responsibility to specific employees for issuing and receiving materials

b)      Updating the reorder points to minimize safety stock

c)      Cycle counting

d)     Logic error checks


35. Which one of the following is not an assumption of the EOQ model?

a)      Decisions for one item can be made independently of decisions made for other items.

b)      There is no uncertainty in lead-time.

c)      The amount of an order received is exactly equal to what was ordered, without any “short shipments” from a supplier or scrap losses in the shop.

d)     Quantity discounts can be taken advantage of for large lot sizes.


36. Which one of the following statements concerning the economic order quantity (EOQ) model is TRUE?

a)      An increase in holding cost will increase the EOQ.

b)      A decrease in demand will increase the EOQ.

c)      A decrease in holding cost will increase the EOQ.

d)     None of the above is true.


37. You have taken a job in industry and are facing your first ordering decision. As you prepare to place the order, you remember your instructor teaching you that you wouldn’t use the EOQ formula if:

a)      you followed a make-to-stock strategy for an item with stable demand.

b)      your carrying costs and ordering costs are known and relatively stable.

c)      the order size is constrained by capacity limitations such as the number or size of the delivery trucks.

d)     your setup costs and holding costs remain constant and can be determined.


38. Which one of the following statements concerning a continuous review system is best?

a)      The inventory position (IP) of an item measures the item’s ability to satisfy future demand, relying only on the on-hand inventory.

b)      An item’s inventory position under a continuous review system increases by Q units as soon as an order is received.

c)      An item’s on-hand inventory increases by Q units as soon as an order is placed.

d)     Under a continuous review system, an item’s inventory position corresponds to the on-hand inventory unless there are backorders or one or more scheduled receipts.


39. Which one of the following descriptions best defines the cycle-service level as a measure of customer service?

a)      The preferred proportion of annual demand instantaneously filled from stock

b)      The number of stockouts tolerated per year

c)      The preferred proportion of days in the year when an item is in stock

d)     The desired probability of not running out of stock in any one inventory cycle


40. An inventory system answers two important questions: when to order and how much to order. Which of the following statements correctly explains how a Q system (continuous review system) or a P system (periodic review system) answers these questions?

a)      Under a Q system, a fixed quantity is ordered every P time period.

b)      Under a Q system, an order is placed to replenish the inventory position up to the target level T when the inventory position reaches the reorder point R.

c)      Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point R.

d)     Under a P system, an order is placed to replenish the inventory position up to the target level T every P time periods.