WCM - AR, AP, Inventory & Cash Control Flashcards
What is Trade Receivable days and its formula?
This is the length of time credit is extended to customers.
Average receivables / credit sales X 365
Explain Early Settlement Discounts?
Cash discounts are given to encourage early payment by customers. The COST (%) of the discount is balanced against the savings the entity receives from having less capital tied up due to a lower receivables balance and a shorter average collection period. .
Calculation of annual cost for Early Settlement Discounts formula?
FIRSTLY calculate number of compounding periods:-
No. of compounding periods = 365 / no of days
(don’t forget this is based on amount left)
365/30=12.167
The simplified formula (1.00/0.97) power to 12.167 = 1.4486 which equals 44.9%
What is the annual cost calculation for ESD based on?
The annual cost calculation is always based on the AMOUNT LEFT TO PAY (the amount net of discount)
When should ESD not be offered?
The discount should not be offered if the COST of offering the discount exceeds the rate of overdraft interest.
What is Trade Payable Days and its formula?
This is the average period of credit extended BY suppliers.
Average payables / credit purchases X 365
What is the cost of financing receivables?
Calculate the receivable balance first:-
Receivable balance = sales x receivable day / 365
then
Finance cost = receivable balance x interest (overdraft) rate
Explain JIT?
Just In Time is a series of manufacturing and supply chain techniques that AIM to minimise inventory levels and IMPROVE customer service by manufacturing not only at the exact time customers require, but also in the exact quantities they need and at competative prices
What are the 3 main systems used to monitor and control inventory levels?
- REORDER LEVEL SYSTEM - whereby inventory is ordered at a particular set order level.
- PERIODIC REVIEW SYSTEM - whereby inventory is checked and reordered at set periods in time.
- MIXED SYSTEMS - incorporating elements of both of the above.
Explain Inventory Warning Levels?
2 Warning levels might be used to indicate when the quantity of inventory is either:-
* higher than should be expected, or
* below the buffer stock level
If the quantity of inventory goes above the MAXIMUM level or BELOW the minimum level, the inventory manager should monitor the position carefully and where appropriate take control measures.
Explain the Periodic Review System?
AKA Constant Cycle
Inventory levels are reviewed at fixed intervals e.g. every 4 weeks.
The inventory in hand is then made up to a PREDETERMINED LEVEL which takes account of:-
* likely demand before next review
* likely demand during lead time
Replenishment orders issued to pre-set target levels. This means that order sizes are variable.
What is ROL?
The Re-Order Level is the quantity of inventory on hand when an order is place.
ROL = demand in the lead time
Explain BUFFER inventory?
The basic level of inventory kept for emergencies (insurance). A buffer is required because both DEMAND and LEAD TIIME will fluctuate and predictions can only be based on best estimates.
Buffer stock has a cost. The annual cost of holding buffer stock is the
amount of the buffer stock x annual holding cost for 1 unit of the inventory item.
Explain “lead time”?
Is the LAG between when an order is placed and the item is delivered.
Explain the criticisms of EOQ?
- it is based on SIMPLIFYING ASSUMPTIONS such as constant & predicted material usage rates;
- it will not indicate the optional purchase quantity when there are price discounts for buying in larger quantities;
- it ignores the problem of managing STOCK OUTS;
It is INCONSISTENT with the philosophy of JIT management and total quality management.
