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Chapter 6: Problem 7

The function of inventory is (a) to meet the fluctuating demand of the market (b) to make smooth production systems (c) to kelp hedge against price increase (d) all of the above

Short Answer

Expert verified
The function of inventory is (d) All of the above.

Step by step solution

01

Understand the Question

The question states that we have to choose the correct answer which represents the function of inventory. We have four options available: (a) To meet the fluctuating demand of the market (b) To make smooth production systems (c) To hedge against price increase (d) All of the above
02

Analyze Each Option

For option (a), inventory does indeed help to meet fluctuating market demand by ensuring availability of goods when needed. (b) is also correct, as having an inventory allows for continuous production by providing necessary resources as needed. (c) is also true, since inventory can act as a buffer against fluctuations in price, allowing companies to buy goods when prices are lower and use them when prices increase.
03

Choose the Correct Answer

Upon analyzing each option, it is clear that all the given statements are functions of inventory in different scenarios. So, the correct answer is (d) All of the above

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Production Systems
Inventory plays a crucial role in ensuring smooth production systems within a company. When a company has a well-managed inventory, it can seamlessly coordinate the supply of materials needed for production, preventing any interruptions in the manufacturing process.

Consider a car manufacturing plant. If a part of the car is missing due to a delay in supply, the entire production line can come to a halt, resulting in inefficiencies and financial losses.
  • With a well-maintained inventory, companies can anticipate delays in supplies and overcome them by using stored materials.
  • This ensures that production continues uninterrupted and deadlines are met, keeping the whole system productive.
In essence, inventory acts as the lifeline of production systems, ensuring that operations run smoothly and efficiently, maximizing both time and resources.
Fluctuating Demand
Another key function of inventory is its ability to meet fluctuating demand in the market. Market demand for products does not always remain constant and can change due to various factors such as seasons, trends, and economic conditions.

For example, consider a toy company during the holiday season. The demand for toys skyrockets, and a company with a sufficient inventory can meet this increased demand without delays.
  • Stockpiling inventory enables companies to have products readily available as consumer demand surges.
  • It allows businesses to satisfy customer needs promptly, enhancing customer satisfaction and brand loyalty.
Having the right amount of inventory to handle demand fluctuations provides businesses with a competitive edge and helps in capturing market opportunities effectively.
Price Hedging
Inventory also serves the purpose of price hedging, protecting companies from unexpected price increases in raw materials or products.

Price hedging through inventory management involves purchasing and storing goods in bulk when prices are low to shield the company from any future price hikes.
  • This strategy allows a company to stabilize its costs and maintain profitable margins.
  • For firms, it means making rational purchasing decisions that safeguard them from volatile market conditions.
For instance, a food processing company might buy large quantities of grain when prices are favorable. By doing so, they ensure that any sudden increase in grain prices does not impact their ability to produce and sell their finished goods at competitive prices. In this way, effective inventory management serves as a financial tool for mitigating sudden market price changes.

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Most popular questions from this chapter

Which of the following statements concerning the basic EOQ model is true? (a) a decrease in demand will increase the \(\mathrm{EOQ}\) value (b) the annual holding cost is less than the annual ordering cost for a smaller-order quantity compared to \(\mathrm{EOQ}\) (c) an increase in holding cost will increase the EOQ value (d) as annual ordering costs increase, so do annual carrying costs

Which of the following DOES NOT belong to the assumption of economic batch quantity (EBQ)? (a) Only two or more items are involved (b) Annual demand is known (c) Usage rate is constant (d) Usage occurs continually

Which of the following are differences between periodic inventory and continuous inventory systems? (a) Continuous inventory systems are time-phased while periodic inventory systems are not (b) Periodic inventory systems have regular order times while continuous inventory systems have irregular order times (c) Periodic inventory systems have regular order quantities while continuous inventory systems have irregular order quantities (d) none of the above

Which of the following is NOT the part of assumptions of basic EOQ model? (a) Demand is known with certainty and is relatively constant over time. (b) Shortages are allowed. (c) Lead time for the receipt of orders is constant. (d) The entire order quantity is received at once and instantaneously.

SDE analysis of inventory deals with (a) utility of the materials (b) cost of the materials (c) availability of the material (d) consumption of the material
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