Profitability/Efficiency Metrics: Inventory Management

Question 1

0-level inventory (potential opportunity cost)

Answer 1

When a product is “sold out” and none is available were a potential new customer to request it

Question 2

complete wastage?

Answer 2

• When a product or service loses all value if not sold by a certain date.

Examples are hotel rooms and airline seats.

Question 3

cost of goods sold - P&L Item

Answer 3

• The standard accounting calculation
  of what it costs to manufacture a given unit of a product.

Question 4

days inventory -

Answer 4

The average number of days between when a product
is completed (or arrives at a retail location) and when it is sold.

Question 5

expiration - “sell-by” dates

Answer 5

• Legal requirements that a product can only
  be sold within a certain time interval.

Question 6

inventory management

Answer 6

• The optimization process of simultaneously minimizing days inventory while avoiding the opportunity cost of having zero
  inventory when more product could be sold.

Question 7

inventory on hand - (value as balance sheet item) -

Answer 7

The value of
inventory on hand at a given moment in time (usually the end of the fiscal
or calendar year).

Question 8

inventory turnover = 365/days’ inventory

Answer 8

• The inverse of days’ inventory - simply calculates how many times in a year a given product on
  average is delivered and sold to a retail location, based on days’ inventory

Question 9

Synonym for
inventory turnover?

Answer 9

inventory turnaround

Question 10

obsolescence -

Answer 10

When a product is no longer in demand due to newer, better, or equivalent but less expensive, alternatives being available.

Question 11

SKUs - Abbreviation for “Stock Keeping Unit” -

Answer 11

every item sold has a unique
ID in the form of an SKU.

Question 12

An airline’s daily flight from Phoenix to New York is usually full, except for flights on Tuesdays and Wednesdays. What is the first change the airline should try?

this case study is an example of a…metric?

Answer 12

profitability metric

The Video Profitability/Efficiency Metrics: Inventory Management at 3:53-4:22 includes the special case of “hotel rooms and airline seats” as products “whose value as inventory goes to zero” if they are not sold before they “expire.”

Question 13

The Video Profitability/Efficiency Metrics: Inventory Management at 1:13 to 5:04 gives four reasons to minimize time in inventory. They include?

Answer 13

• negative float,
• fixed cost of storage,
• risk of complete wastage,
• and product obsolescence.

Question 14

The average number of days inventory is held should be minimized for ALL of the following reasons EXCEPT________.

1 / 1 point

• The longer a product stays in inventory, the less likely it will be purchased
• Customers are frustrated if something they want is not in stock
• Some products will be wasted completely if they don’t get purchased by a certain time
• The longer the negative float, the more interest a business has to pay
• It costs money to store the products

Answer 14

Customers are frustrated if something they want is not in stock

The Video Profitability/Efficiency Metrics: Inventory Management at 1:13 to 5:04 gives four reasons to minimize time in inventory. They include: negative float, cost of storage, risk of complete wastage, and product obsolescence.

Customer frustration when a product is not available immediately in their local store is discussed in the same video at 8:43-10:00, but this problem has a different solution that needs to be balanced against average time in inventory. Seasonal and regional shifts in inventory can ensure products are available when wanted and won’t sit on the shelf.

Question 15

The math formula for calculating days inventory from annual cost of goods sold, and value of year-end inventory (from public company annual reports) , is given and explained in the Video Profitability/Efficiency Metrics: Inventory Management at 5:04-7:08?

Answer 15

Question 16

What is the estimated days inventory of Company X based on the information below?

Company X’s annual report listed a year-end inventory of $35.4 million, and annual cost of goods sold of $137.9 million.

1 / 1 point

93. 7 days
94. 2 days
95. 9 days
96. 3 days

Answer 16

93.7 days

Question 17

What is one of the primary ways that operating companies can reduce their costs and

maximize profitability without lowering the quality of what they sell in any way?

Answer 17

Inventory management

Question 18

case study:

For the fiscal year ended January 2014,

the Walmart annual report gave year end inventory of 44.9

billion and annual cost of goods sold 358.1 billion.

Play video starting at 6 minutes 23 seconds and follow transcript6:23

Walmart’s estimated days inventory turnover for

the year is?

Answer 18

44.9 divided by 358.1, or

one-eighth, times 365, or approximately 46 days.

Question 19

the downside of the days inventory metric?

Answer 19

it does not tell us anything about which of our thousands or tens of thousands of items are not selling as quickly as expected and why.

It could be that particular products are seasonal, are no longer in fashion, or getting returned by customers as defective.

These are all dynamic metrics that we want to know immediately.

Question 20

how do All companies that have embraced big data culture, and this includes the major US retail grocery chains such as Walmart, 7-Eleven, Costco, etc., all track inventory turnaround and

days inventory at the individual product SKU level?

Answer 20

They further subdivide that analysis by geographic region of the country and

even by individual store.

This is done by tracking the date and

quantity when any item is reordered by local management, and

often also when the item is delivered and stocked on the shelf.

And that’s compared against cash register sales data

the identifies the exact time and SKU for all sales.

So for example, if a store in North Carolina sells 50 snow shovels per year,

and all those sales are between December and March, it does not make sense for

them to hold snow shovel inventory between April and November.

Play video starting at 8 minutes 16 seconds and follow transcript8:16