Chapter 12 GMS401

3 Pages

Global Management Studies
Course Code
GMS 401
Kirk Bailey

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Chapter 12: Inventory Management LO1: Introduction Inventory: An idle material or product, usually in a warehouse or storeroom and kept for use or sale in the future. Inventory Management: Planning and controlling the inventories. Importance of Inventories  Major source of inventories  Typical company: ~30% of its current assets ~90% of its working capital:  INVESTED IN INVENTORIES.  One widely used measure is R.O.I. (Return on Investment): This is profit AFTER taxes divided by total assets. Since INVENTORIES likely represent a SIGNIFICANT portion of total assets, A reduction in INVENTORIES can represent a SIGNIFICANT increase in R.O.I. Functions (Purpose) of Inventories 1. To wait while being transported.  Raw materials and parts from suppliers, and finished goods from manufacturers heading to markets need to be transported. Depending on the method of transportation and the destination itself it could take the freight months to arrive. Items being transported are called in-transit inventory. 2. To protect against stock outs.  Risk of shortage can be reduced by safety-stock, which are stocks in excess of average demand to compensate for variability’s in demand and delivery lead- time. -if usage rate higher than expected. -if supplier delivery is delayed. 3. E.O.Q.’s and quantity discounts.  In order to reduce costs organizations purchase materials in bulk even thought it exceeds their demand. This is then stored for later use. 4. To smooth seasonal demand or production.  For organizations that have seasonal demand they normally build up their inventories during off-season periods to meet high requirements during peak season. 5. To decouple operations.  Use inventories as buffers so while a problem is going on production can still continue temporarily while the problem is being resolved. 6. To hedge against price increases.  If a manager feels that the materials they sue to create a product will have a price increase they will buy a lot of the product needed and store it. This is called anticipation inventory. Importance and Objectives of Inventory Management  Under and over stocking of items are 2 major problems than can occur when inventory management is not done correctly. - Under-Stocking: results in missed deliveries, lost sales, dissatisfied customers, and production stoppage. - Over- Stocking: ties up funds that might be more productive elsewhere and also ties up storage space.  Inventory management has 2 main concerns: 1. Level of Customer Service (Availability) 2. The Costs of Ordering and Holding Inventories.  Inventory Turnover: The ratio of annual costs of goods to average inventory investment. The inventory turnover rate indicates how many times a year the inventory is sold or used. - The higher the ratio the better, because that implies more efficient use of inventories. LO2: Requirements for Effective Inventory Management Inventory managers are required to perform the following activities: 1. Safely storing and managing inventories.  Things that can freeze e.g. Paint mus
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