chapter 7 fundamentals of inventory
TRANSCRIPT
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SCM 303
Chapter 7 (Pages 234-243)Managing Inventories
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Supply Chain Management and InventoryManagement
A major emphasis over the past two decadeshas been placed on reducing the amount ofinventory
There are many who argue that having
inventory is bad Their reasoning is based on the financial
implications of holding inventory
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Types of Inventory
Raw materials/Component Parts
Work-in-process
Finished goods
Maintenance, repair, and operating supplies
(MRO)
Transit Inventory
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Balance Supply and Demand
Seasonality
Production Processes
Provide Buffer against Uncertainty/Variability in
Supply and/or Demand (Buffer/Safety Stock) Basic Economics of Buying
Geographic Specialization
So, Why Carry Inventory?
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Financial Implications of Inventory
Inventory represents investment by the firm It is an asset on the firms balance sheet
Companies typically desire to keep their investmentin assets as low as possible
Maintaining inventory costs money on an on-going basis.
Thus, inventory also causes expenses to be incurred
These expenses show up on the firms income
statement
However, not having inventory when customerswant it results in negative financial
consequences as well
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Cost of capital (opportunity cost) Cost of owning and maintaining storage space Taxes
Insurance Costs of obsolescence and loss Costs of material handling, tracking, and
management
Inventory Holding/Carrying Cost
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AVERAGE PERCENT PERCENTELEMENT OF COST RANGE
Cost of Capital 15.0 8.0 30.0Taxes 1.0 0.5 2.0
Storage /handling/mgt. 2.0 2.0 6.0
Insurance 0.5 1.0 4.0
Obsolescence 1.2 0.5 8.0
Total 19.7 11.0 50.0Percentage is annual percent of average inventory value
INVENTORY HOLDING COST
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Inventory Carrying Cost
Suppose average inventory for a firm is$3,500,00. The company has determined thatits inventory carrying cost is 25%. What is the
annual expense of holding inventory? The company is able to reduce inventory to an
average of $2,750,000? What is the savingsassociated with this reduction?
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OTHER COSTS RELATED TO INVENTORY
Ordering Costs Preparation
Transmittal
Receiving
Payment processing
Stockout Costs
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Inventory turnover Days of Supply Service level
Discussed in more detail in Chapter 9, but shouldunderstand the basic concept of a stockout
Measures of Inventory Performance
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Inventory turnover= Net SalesAverage inventory at retail
Inventory turnover= Cost of goods soldAverage inventory at cost
Inventory turnover= Sales in Units
Average inventory in Units
Calculating Inventory Turnover
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Company Cost ofGoods BeginningInventory EndingInventory AverageInventory InventoryCarryingCost*
InventoryTurnover
Boeing $55,867.00 $24,317.00 $32,240.00 $28,278.50 $5,665.70 1.98Deere 22,034.40 3,063.00 4,371.00 3,717.00 743.40 5.93Ford
113,345.00
5,917.00
5,901.00
5,909.00
1,181.80
19.18
Hewlett-Packard 97,529.00 6,466.00 7,490.00 6,978.00 1,395.60 13.98Kellogg 7,750.00 1,056.00 1,132.00 1,094.00 218.80 7.08Procter &Gamble 40,768.00 7,379.00 6,384.00 6,881.50 1,376.30 5.92Target 48,306.00 7,596.00 7,918.00 7,757.00 1,551.40 6.23Wal-Mart 335,127.00 36,318.00 40,714.00 38,516.00 7,703.20 8.70HyattHotels 2,957.00 100.00 87.00 93.50 18.70 31.63Starwood 4,994.00 802.00 812.00 807.00 161.40 6.19
Table 7-1: Example Inventory Levels, Turnover, and Carrying Cost(Fiscal Year 2011, $ figures in millions)*Inventory Carrying Cost calculation assumes a 20% annual rate.
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Turnover
Advantages of high turn over:Fresh inventory from high sales
Reduced risk or mark down from obsolescence
Reduced total carrying costs
Lower asset investment and higher productivity
Dangers of high turnover:
Stockouts may mean lower sales
Increased costs from missing quantity requirementsIncreased ordering costs
713
Turn over Turn over
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Days of Supply
How many days of demand into the future can we satisfyfrom inventory on hand? Current Inventory/expected rate of daily demand
Suppose a firm currently has a total of $8,000 inventory of an
item. It expects demand to average $200 per day. What is thedays of supply of the item?
$8,000/$200 = 40 days
If the firm consistently maintains an average of 40 days ofsupply, what inventory turnover rate will it have for the year?
360 days/40days = 9 turns/year (It is convention to think of a yearas 360 days for this calculation just because its simpler arithmeticthan thinking about 365 days).
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Problems to work
Note: This is NOT a graded homeworkassignment, but you can expect that knowinghow to work these will be useful on the exam!!
Work problems 1-4 at the end of Chapter 7.