Inventory Management and Control Flashcards

What does ABC analysis classify inventory items based on?

Answer: Annual usage value

ABC analysis classifies inventory items by annual usage value, with A items representing the highest value (roughly 80% of total value) and C items the lowest.

In ABC analysis, which category typically represents approximately 20% of SKUs but 80% of total inventory value?

Answer: A items

A items follow the Pareto principle—roughly 20% of SKUs account for about 80% of total annual inventory value and receive the most management attention.

What is cycle counting in inventory management?

Answer: A continuous audit where a subset of inventory is counted on a rotating schedule

Cycle counting is a perpetual auditing technique where a portion of inventory is counted regularly throughout the year rather than in a single annual physical count.

Which inventory cost is incurred when a company cannot fulfill a customer order due to insufficient stock?

Answer: Stockout cost

Stockout costs arise when demand cannot be met due to inadequate inventory, encompassing lost sales, expediting fees, and customer dissatisfaction.

What is the primary purpose of safety stock in an inventory system?

Answer: To buffer against demand and supply variability

Safety stock acts as a buffer to protect against unexpected increases in demand or replenishment lead time variability, reducing the risk of stockouts.

Which of the following is an example of an inventory carrying cost?

Answer: Warehouse storage and insurance costs

Carrying costs are all costs associated with holding inventory over time, including warehousing, insurance, obsolescence, taxes, and the opportunity cost of capital tied up.

What does the inventory turnover ratio measure?

Answer: How many times inventory is sold and replaced over a period

Inventory turnover ratio measures how many times a company sells and replenishes its inventory over a given period, indicating how efficiently inventory is being managed.