Chapter 10: Management Operations Part 2 Flashcards
Inventory Management
definition
- Management of inventory and stock
- Encompasses the control of three types of inventory: materials, work in process, finished goods
JIT
- Business does not maintain an inventory of goods and services
- Orders for materials when customers places orders
JIT:
Advantages
Reduction in inventory cost
- No employees, utility cost, storage space
Allow greater customisation in the production process
- Customers are able to customise it to their taste
JIT:
Disadvantages
High reliance on supplier
- Failure in delivery of materials can lead to expensive production delays and stock-out
Does not allow the same level of purchasing of economies of scale
- Unlike buying in bulk, frequent small deliveries are likely to be expensive
JIC
definition
- A business stores and maintain a large amount of inventory
- Business avoid running out of stock
JIC:
Advantages
Reduce fixed cost
- Fixed cost can be averaged out more when ordering in bulk and transporting large amount of inventory
No production set back
- Raw material supply hold-up will not lead to production delay
- Does not rely on suppliers
JIC:
Disadvantages
Higher cost for inventory storage
- Employees, utility cost, storage space
Risk of goods being damaged or outdated
- Damaged in warehouse
- Outdated trend will lead to waste of production
JIT vs JIC
- Product (does it expire fast)
- Location (of supplier)
- Supplier (how fast does are they at supplying)
- Sales forecasting (festive seasons with surges in demand)
- Inventory control system (how sophisticated or simple the machineries are)
Financial Ratios
- A tool used for measuring a firm’s liquidity, profitability and reliance on debt financing, as well as effectiveness of management’s resource utilisation
- Allows comparison with other companies and with the company’s own past performance
Liquidity Ratio
- How much short term funds the business has to meet its short term debts
Current Ratio
- Measures a business’s ability to pay its debts as they mature
Profitability Ratio
- The capacity of a business to make profit and provide a return on investment
Gross profit ratio
- Used to measure a business’s profitability before expenses and how profitable a company sells its inventory
Net profit ratio
- Measure a business profitability after all expenses have been paid
Expense ratio
- Measure the amount of expense in each dollar of income earned
- Reflect the efficiency of the operation from one period to the next
Return on equity ratio
- Measure the percentage return on the owner’s investment in the business
Stability Ratio
- Indicates how reliant on debt a business is for its operating funds
Debt to equity ratio
- How much debt can be supported by the company and whether its debt and equity are balanced
