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Inventory Management

Inventory management is an important area of concern in working capital management. Corporate financial managers are concerned with whether or not they well have enough inventory to meet demand, and balancing this concern with the carrying costs of inventory (such as the opportunity cost of cash is tied up in investments in inventory, storage (warehousing) costs, the cost of obsolescence, insurance, and shrinkage).  

Decisions in inventory management also affect other areas of working capital management. For example, capital budgeting is used to ensure that the firm will have enough cash to cover its raw material or merchandise inventory purchases. The inventory policy the firm chooses will affect how much cash the firm needs to fund its investment in inventory. Similarly, cash requirements may lead to short-term financing needs and the related fnancing decisions. Furthermore, a firm may loosen its credit policy or offer sales discounts if it has too much inventory on hand, or vica versa in order to slow sales. 

Two Strategies for Production Planning: 

There are two pure strategies used in production planning: the chase strategy and the level production strategy. In practice, a mixed strategy, or some combination of the two, is typically used. 

Chase strategy: Also known as seasonal production or demand-matching strategy. This strategy attempts to match production with demand, producing only enough goods to exactly match the demand for goods for the period. This strategy keeps investment in inventory low and reduces inventory carrying costs, but has high smoothing costs. 

Level production: A company that uses level production continuously produces a constant amount of goods each period equal to the average demand. For example, an RV company that sells 120,000 RVs a year, most in the summer might produce 10,000 RVs each month in expectation of this demand. It allows for a stable workforce, no overtime, low smoothing costs, but high inventory carrying costs.  

Two Strategies for Ordering Inventory or Raw Materials:

Production planning looks at how inventory moves from raw materials, through work-in-process, to finished goods. Inventory management also looks at how the raw materials (or merchandise inventory for a retailer) is ordered in the most efficient way. There are two prominent examples of inventory management strategies: economic order quantity and just-in-time.  

Economic order quanity (EOQ): EOQ is the order quanity that minizmizes total inventory holding costs and ordering costs. It is one of the oldest classical production models. Economic order quantity takes into account a fixed cost for placing each order of inventory, and a holding cost for holding inventory in storage. The model allows us to calculate how many units to order inorder to minimize the total costs related with ordering inventory. 

Just-in-time: Just-in-time is an inventory strategy that attempts to reduce holding costs by having inventory available only as it becomes needed. It requires much more commitment by management to implement succesfully then simply setting reorder policy based on the economic order quanity. As a result, we also discuss Just-In-Time under Management Tools and Techniques, under Business Strategy. 

LOG 401

Identify an example of inventory in your own life. Estimate how much it costs you to hold this inventory. Estimate the "ordering cost" when you take something out. How often do you replenish this inventory and do you have any inventory policy such as first-in-first-out, last-in-first-out, etc.?

Distribution Centers

Which is more important to a distribution center, a good transportation system or a plentiful workforce? Is there a trade-off between the level of workforce and transportation technology? Are they mutually exclusive? Why...why not? On a related subject, as you will soon see, multimode distribution is rapidly becoming the thing

Corporate Strategies of Overstock

Need a little assistance on Overstock's strategic choices at corporate level. 1. What are Overstock's corporate level strategies? 2. What generic Porter strategy does the company follow? 3. Are Overstock's strategic choices in sync with the Porter generic strategy you believe the company follows?

Operations Management Inventory Quantity Discounts

Please show your calculations and round to FOUR decimal places. A retailer needs to choose between two suppliers for one of its products. The only criterion used for the decision is the cost. The following information about the product is available: Demand 200 a week Ordering cost (for all suppliers) $75 per order Holdi

Obsolete inventory, inventory policy footnotes: Cisco 2013

A company's annual report usually will identify the inventory method used. You can analyze the effects of the inventory method if you have the income statement and balance sheet of a company. Go to the Cisco website(see attachments). Address the following questions based on the current year's Annual Report on Cisco's website


A fire completely destroyed the entire inventory of Printing Delight Company on April 10, 2014. Fortunately, the books were not destroyed in the fire. The following information is taken from the books of Printing Delight Company for January 1 to April 10 of 2014. Beginning inventory on Jan. 1 $ 45,000 Ne

Prod & Ops Mgt develop inventory system in excel

Given the following information, determine an inventory management system for an item in demand 50 weeks/year. Item Cost $10 Order Cost $250 Annual Holding Cost $3.33/unit Annual Demand 25,750 Weekly demand 515 Std Dev of Demand 25/week Lead Time 1 week Std Dev of Lead Time 0.1 week Service Level 95% a. State th

Observing Physical Inventory

Describe some considerations for observing physical inventory. Explain a fraud scheme that may be used for inventory.

Risks with physically accounting for inventory

You are responsible for auditing a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and in two public warehouses. An electronic inventory file is maintained on a computer disk, and at the end of each business day th

Required Total Production and Cost of Purchases

Greener Grass Fertilizer Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 6 percent per month. The desired monthly ending inventory in units of finished product is 75 percent of the next month's estimated sales. There are 150,000 finished units in inventory on June 30. Eac

Moose County Journal of Sales

The general ledger of Moose County Something includes the following accounts: Cash........................111 Equipment............189 Inventory...............131 Accounts Payable..211 Prepaid Insurance.161 Rent Expense........562 Supplies.................171 Utilities Expense...565 Transactions in July t

Sales Journal for Pickax Electronics

The general ledger of Pickax Electronics includes the following selected accounts, along with their account numbers: Cash...........................111 Sales Revenue.........................411 Accounts Receivable.112 Sales Discounts.......................412 Notes Receivable... ....115 Sales Returns and Allowance.413 I

Compute the amount of the receivable for Sweet Dreams Company

Sweet Dreams Company, a retailer of beds and mattresses, engaged in the following transactions during September: Sept. 4 Purchased inventory for cash, $14,000. 6 Purchased store supplies on credit from C. Paper, terms of n/30, $660. 9 Purchased inventory of $5,500 plus shipping charges of $200 from R.U. Sleepy; credit

Foreign Statement Translation

Royal Tea, a wholly-owned English subsidiary of U.S. Beverages (a U.S. firm) maintains its inventory at cost, and Royal Tea's books are reflected in British pound sterling. U.S. Beverages' functional currency is U.S. dollars. Determine the inventory value using both the temporal and current methods. Show how this will be

Percentage increase in cost of goods sold

1. Assume the following cost of goods sold data for a company: 2014 $1,680,000 2013 1,400,000 2012 1,200,000 If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014? 2. Krug Corporation has income before taxes of $900,000 and an extraordinary gain of $300,000. If the inco

Hana Ranch Company

Hana Ranch Company, which has never been audited, is asked on October 1 by its bank to arrange for a year-end audit. The company retains you to make this audit and asks what measures, if any, it should take to ensure a satisfactory year-end physical inventory. Perpetual inventories are not maintained. How would you answer this q

Analyzing Small Business Inventory and Operations

See the attachment. Process Analysis Queuing You have taken a job as manager of Cupcake Heaven in Old Town Alexandria, Virginia. It is located on a busy street with lots of walk-in traffic. The owner, Sue, is thrilled at the prospect of you helping her analyze her operations. Cupcake Heaven currently operates in the following

Understanding and Presenting Just In Time Inventory Management

Design a presentation on inventory management structured by the following: A. At its basic theory, what is Just in Time (JIT) inventory management all about? B. From an internal, operational perspective, if JIT is strictly adhered to, what is one downside to making everything literally "to order?" C. How does a Kanban syste

Merchandising Operations and Inventories.

Develop and analyze this material to understand every detail and be ready for what continues. I. Presented below is financial information for two different companies. New York Florida Company Company Sales 90,000

Day to day Metrics versus traditional metrics, Linking Metrics

The CEO heard about your lunchtime discussion with the supervisors and managers when metrics were discussed. He would like you to help him prepare a PowerPoint presentation that he could use at the next board of directors meeting to link the day-to-day new metrics you suggested using to the bigger picture metrics that CEO's, CFO

Information on Retailers

1.Why do retailers perform extensive inventories at the end of a fiscal year. Why do retailers mark down items for quick sale before the end of a budgeting period? Is this wise? 2. Implementing a merchandising plan is an eight-step process beginning with gathering information and ending with a re-evaluation process. What is t

Larsen Realty Corp & Chippewas Company

Please see attached. There are two problems, they are under sheet 1 and sheet 2. E9-7 (Relative Sales Value Method) Larsen Realty E8-9 (Periodic versus Perpetual Entries) Chippewas

Materials Requirements Planning

The CEO of the organization has declared "war" on excessive inventory. Operational people within the organization want more inventory available to produce the products for the customer. The financial analysts agree with the CEO. - Why are there 2 viewpoints, and why do they vary? - What are the drawbacks to excess inventory

Larop Corporation: Costs

The following data (in thousands of dollars) have been taken from the accounting records of Larop Corporation for the just completed year. Sales......................................................................................... $870 Purchases of raw materials............................................................

Inventory Calculations: Kepler's Fudge Factory

Kepler's Fudge Factory had the following information available for the month of September: Beginning Ending Raw materials inventory $41,000 $21,000 Work in process inventory $26,000 $36,000 Finished-goods inventory $31,000 $21,000 Raw material purchased $98,000 Direct labor (2,000 hrs. @9)

Everglades Marine Company

The Everglades Marine Company has the followng inventory balances at the beginning of January: Raw Materials Inventory: $71,568 Work-in-Process Inventory: $109,788 Finished Goods Inventory: $92,757 During January, the Everglades Marine Company incurred $106,806 in overhead costs and $193,200 in direct labor cost