Corp.finance 3: Working capital Management (3) - Inventory

MANAGING INVENTORY

• Aim: keep production continuous however, NO more inventory than necessary
  
• Motive for holding inventory
• Transaction motive
• inventory is needed as a part of the routine production-sale cycle <=> equals to planned manufacturing
  
• dictated by the manufacturing plan
  
• Precautionary stock
• avoid  any stock-out losses <=> profit lost from not having sufficient inventory on hand to satisfy demand (NOT enough inventory)
• Speculative motive, for example
  
• ensuring the availability & pricing of inventory
  
• Results of inappropriate inventory reserved
• Over reserved
  
• liquidity squeezes
• misuse of facility
• reduce firm's competitiveness: can't match pricing 'cos of its large inventory costs
  
• Under reserved
• losing customers (stock-out losses), gain their ill-will from long delays delivery (?)
  
• plant shut down & expensive special runs
  
• inability to avoid price increases by suppliers
• Approach to managing levels of inventory
• EOQ (economic operating quantity)
• safety stock: @ Q that needs to order new inventory
  
• anticipation stock: Q> Q that needs to order new inventory
  
• JIT (just in time), combined with Manufacturing Resources Planning (MRP)
• Inventory cost
• ordering
• carrying
• stock-out
• policy
  
• Evaluating inventory management
• No. of days of inventory
• Inventory turnover