Profitability/Efficiency Metrics: Inventory Management Flashcards
0-level inventory (potential opportunity cost)
When a product is “sold out” and none is available were a potential new customer to request it
complete wastage?
- When a product or service loses all value if not sold by a certain date.
Examples are hotel rooms and airline seats.
cost of goods sold - P&L Item
- The standard accounting calculation
of what it costs to manufacture a given unit of a product.
days inventory -
The average number of days between when a product is completed (or arrives at a retail location) and when it is sold.
expiration - “sell-by” dates
- Legal requirements that a product can only
be sold within a certain time interval.
inventory management
- The optimization process of simultaneously minimizing days inventory while avoiding the opportunity cost of having zero
inventory when more product could be sold.
inventory on hand - (value as balance sheet item) -
The value of
inventory on hand at a given moment in time (usually the end of the fiscal
or calendar year).
inventory turnover = 365/days’ inventory
- 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
Synonym for
inventory turnover?
inventory turnaround
obsolescence -
When a product is no longer in demand due to newer, better, or equivalent but less expensive, alternatives being available.
SKUs - Abbreviation for “Stock Keeping Unit” -
every item sold has a unique
ID in the form of an SKU.
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?
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.”
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,
- fixed cost of storage,
- risk of complete wastage,
- and product obsolescence.
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
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.
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?
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
- 7 days
- 2 days
- 9 days
- 3 days
93.7 days
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?
Inventory management
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?
44.9 divided by 358.1, or
one-eighth, times 365, or approximately 46 days.
the downside of the days inventory metric?
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.
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?
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
