Appendix 15A Inventory Management
Answers and Solutions
15A–1
Web Appendix 15A
Inventory Management
Answers to Questions
15A-1 Errors in establishing inventory levels quickly lead either to lost sales or to excessive carrying costs;
thus, inventory management is as important as it is difficult. There are costs associated with
holding too little inventory, and these costs can be severe. Generally, if a business carries low
levels of inventories, it must reorder frequently—which increases ordering costs. Even more
important, firms can miss out on profitable sales, and also suffer a loss of goodwill that can lead to
lower future sales. So, it is important to have enough inventory on hand to meet customer
demands.
15A-3 Inventory management requires the establishment of an inventory control system. Inventory
control systems run the gamut from very simple to extremely complex, depending on the size of
the firm and the nature of its inventory. Some systems are: red-line method, two-bin method,
computerized inventory system, and just-in-time systems. The red-line method is an inventory
control procedure in which a red line is drawn around the inside of an inventory-stocked bin to
15A-4 An approach to inventory control called the just–in-time (JIT) system was developed by Japanese
firms but has gained popularity throughout the world. Toyota was one of the first companies to
aggressively employ a just-in–time system. Their setup was designed to link the company’s
15A-5 Outsourcing is the practice of purchasing components rather than making them in-house. It’s an
important development related to inventory as it allows firms to reduce their inventory costs.
Outsourcing is often combined with just–in-time systems to reduce inventory levels.
15A–2
Answers and Solutions
Appendix 15A Inventory Management
15A-6 A final point relating to inventory levels is the relationship between production scheduling and
inventory levels. Just-in-time systems, outsourcing, and production scheduling all point out the
necessity of coordinating inventory policy with manufacturing/procurement policies. Companies try