Module 4: Working Capital Management

Question 1

Carrying cost consist of what?

Answer 1

Storage cost
Insurance cost
Opportunity cost of inventory investment
Lost inventory due to obsolescecne or spoilage

• the lower the carrying cost, the more inventory companies are willing to carry

Question 2

What is safety stock?

Answer 2

Ensures manufacturing or customer supply requirements are met.

Depends on:

• reliability of sales forecast
• possibility of sales dissatisfaction resulting from back orders
• stock out cost (cost of running out of inventory)
• lead time(time that elapses from the placement to the receipt of the order)
• seasonal demand on inventory

Question 3

Concepts related to Optimal Levels of Inventory:

Answer 3

• Inventory turnover
• safety stock
• recorder point
• economic order quantity
• materials requirement planning

Question 4

Recorder point?

Answer 4

Inventory point at which a company should order or manufacture additional additional inventory to meet demand and avert incurring stock out cost:

Recorder point=safety stock + (lead time x Sales during lead time)

Question 5

What is carrying cost?

Answer 5

the cost of holding inventory

Question 6

What is ordering cost?

Answer 6

the cost of ordering additional inventory. driven by order frequency (rather than quantity per order)

Question 7

What is the Economic Order Quantity aka EOQ?

Answer 7

inventory model that attempts to minimize total ordering and carrying cost

E=square root(2SO/C)

E=order size
S= Annual Sales
O=Cost per Purchase Order
C=Annual Carrying cost per unit

Question 8

Just in Time (JIT) Models?

Answer 8

Inventory model developed to reduce lag of time between inventory arrival and inventory use. Reduces the need of manufactures to carry large inventories, BUT requires a considerable degree of coordination between manufacturer and supplier.

Question 9

Supply Chain Operations Reference (SCOR) Model?

Answer 9

generic model for supply chain analysis. 4 key management processes OR activities pertaining to score: plan, source, make, and deliver.

planning (properly balancing demand & supply): sales forecast (determining demand requirements), ability of suppliers to supply resources, planning the inventory levels

source (procure the resources require to meet it): selecting vendors

make (turn the raw materials into finished products to meet a demand) : production process, manufacturing the product, testing, & packing the product

deliver(activities of getting the finished product into the hands of the ultimate consumers to meet their planned demand): managing of orders, forecasting, pricing, managing of transportation, shipping & labeling of products

Question 10

Trade credit (or accounts payable)?

Answer 10

largest source of short term credit for small firms

Question 11

Calculating payment discounts:

Answer 11

APR of quick payment discount = 360/(pay period - discount period) x discount %/(100-discount %)