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
MANAGING A/R (account of receivables)
- A/R features
- important, 'cos:
- lead to customers' default (more popular), or
- lead to decrease sales
- a go-between for credit manager, treasury manager & accounting manager => need to combine the operating
- considered to be a derivative activity from credit granting
- goals of managing AR:
- update
- accurate
- exactly appropriate btw the 3 department
- How to do managing:
- inside: by captive finance subsidiary: established to provide financing of the sales of the parent firm
- outside: outsourcing service
- Key element of trade credit granting process
- Types of credit accounts
- Ordinary terms: standard format
- Net t: pay fully @ t days after today
- d/t1 net t: discounted d% if pay in t1 days from now, or full @ t days after today
- CBD: cash before delivery
- COD: cash ON delivery
- Bill-to-bill: pay for Nth bill before (N+1)th bill
- Monthly billing: pay monthly
- Credit scoring model
- Managing customers' receipts (not yet understood)
- Evaluating AR management
- AR turnover, no. of days of AR: rough data, tell nothing 'bout quality of AR
- weighted average collection period
- separate AR in different groups, for example: 1-30days, 31-60days...
- compute % of each group in total AR (*), eg.: 20/100 = 20%
- weighted days: multiply (*) by average day in each aging group, for example: average day of aging group "1-30 days" is 28 days => 20% * 28days = 5.6 weighted days
- sum all the weighted days => weighted average collection period
