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Unformatted text preview: Chapter 12 Inventory Management TEACHING TIP Open with the Inventory Management at Wal-Mart. The firm is implementing radio frequency identification (RFID) technology in its supply chain because they realize that without accurate information, companies can make major mistakes by ordering too much, not enough, or shipping products to the wrong location. Companies can have large inventories and still have stockouts of products because they have too much of some products and not enough of others. Managing inventories is a process that requires information about expected demands, amounts of inventory on hand and on order for every item stocked by the firm at all locations, and the appropriate timing and size of the reorder quantities. This chapter focuses on the decision-making aspects of this process. A. Inventory Management Across the Organization 1. Inventories are important to all types of organizations and their employees. a. Inventories affect everyday operations because they have to be counted, paid for, used in operations, used to satisfy customers, and managed. b. Inventories require an investment of funds. c. Monies invested in inventory are not available for investment in other things. 2. Inventory a boon or bane? a. Too much inventory on hand reduces profitability. b. Too little inventory on hand damages customer confidence. c. Inventory management involves trade-offs. B. Inventory Basics 1. Pressures for low inventories a. Collectively called “inventory holding cost,” or “carrying cost.” The cost to keep an item on hand for a year typically ranges from 15 percent to 35 percent of the item’s value. b. Components of holding costs • Cost of capital is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. • Storage and handling costs • Taxes, insurance, and shrinkage ⇒ More taxes are paid if end-of-year inventories are high ⇒ Cost of insuring inventories proportional to inventory level 12-1 12-2 Chapter 12: Inventory Management ⇒ Shrinkage ° Pilferage ° Obsolescence ° Deterioration 2. Pressure for high inventories a. Customer service • Creating inventory can speed delivery and improve the firm’s on-time delivery of goods. • High inventory levels reduce the potential for stockouts and backorders. ⇒ Stockouts—when a standard item is not on hand when demand occurs, and the sale is lost ⇒ Backorders—customer order not filled when promised or demanded but is filled later b. Ordering cost – cost of preparing a purchase order for a supplier or a production order for the shop. c. Setup cost • The cost involved in changing over a machine to produce a different item....
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- Spring '09