Working Capital Management Part 1 _ M4 Flashcards
What is Just-In-Time Inventory (JIT)?
- Involves maintaining a lower level of inventory.
- Requesting inventory from suppliers as needed.
- It is designed to reduce the carrying costs, while reducing the risk of inventory obsolescence.
- Involves fewer suppliers, as the relationships and coordination with suppliers is extremely critical.
- Having production employees make purchasing decisions is faster and more efficient.
- It is a pull-through inventory system, as the customer’s order drives the need for inventory.
What are some problems of using JIT Inventory?
- If the actual lead time takes longer than anticipated.
- Since you’re not buying in bulk, you lose the quantity discounts.
- Quick deliveries on short notice, could negatively affects the quality of inventory and cause inventory shortages.
What are the benefits of JIT?
- Supplies arriving at regular intervals throughout the production day.
- Reduced set-up time (lag-time) between inventory arrival and use.
- Employees with multiple skill sets being used for greater efficiency.
- Reducing the carrying costs of maintaining inventory.
JIT says inventory does not add value so why have it on hand?
What is the fundalmental concept of JIT?
The fundamental concept of just-in-time (JIT) inventory management is that inventory does not add value.
What is a traditional inventory system?
- Traditional approaches tend to maintain higher inventory levels.
- Requires less coordination with suppliers.
- Incurs greater carrying costs.
- Push systems begin with forecasting customer demand.
What does the level of safety stock depend on?
- Uncertain sales forecasts - greater uncertainty means a higher level of safety stock should be carried.
- Dissatisfaction of customers - if customers are dissatisfied with back orders, then more safety stock should be carried.
- Uncertain lead times - greater uncertainty means a higher level of safety stock is needed.
How to calculate safety stock?
Carry cost + Stock-out Cost = Safety Stock
Stockout Cost
Stockout units 100
Stockout cost per units × $5 = $500
Probability at 100 safety stock level × .15 = $75
Orders per year × 10
Expected stockout cost $750
Carrying Cost
Inventory investment per unit $50
Carrying cost percentage × 20%
Carrying cost per unit $10
Safety stock units × 100
Carrying cost $1,000
Total annual cost of safety stock of 100 units $1,750
What is the equation for reorder point for inventory?
or Safety Stock
Reorder Point = Safety Stock + (Lead Time × Sales).
What is the optimal level of inventory affected by?
- The time required to receive it.
- The cost per unit of inventory.
- The cost of placing an order impacts order frequency.
What is the fasted way to get capital for the firm?
- Accounts payable.
Additional ways to get capital:
- Accounts Receivables takes time to factor.
- Debentures takes time to issue.
- Preferred stock takes time to issue.
What are the elements in the Economic Order Quantity (EOQ) formula?
E= 2SO/C
- Take the square root of two times the annual Sales (in units) times the cost per purchase Order divided by the Carrying cost per unit (an amount that frequently includes insurance costs).
- (EOQ) method of inventory control anticipates orders at the point where carrying costs are nearest to restocking costs.
- The objective of EOQ is to minimize total inventory costs.
What are the assumptions associated with EOQ?
- The economic order quantity formula (EOQ) assumes that periodic demand is known. Annual sales volume is a crucial variable in the EOQ formula.
- The cost of placing an order is anticipated to remain constant.
What are carrying cost?
Carry cost per unit is expected to remain constant
- Opportunity cost of foregoing a return on the money invested in inventory.
All costs associated with warehousing (storing) inventory:
- Storage.
- Insurance.
- Obsolescence.
- Spoilage associated with holding inventory).
- Cost of capital invested in inventory.
What is Supply Chain Management?
- Is the close linkage and coordination of the activities involved in buying, making, and moving a product.
- Is involved with what, when, where, and how much of product manufacturing and sale.
- Supply chains have to be constantly reengineered as products change and to increase efficiency and reduce costs.
What are the 3 elements of Supply Chain Management?
- The Goal is to understand the needs and preferences of customers.
- Supply Chain Operations Reference (SCOR) Model (plan, source, make, deliver).
- Benefits of Supply Chain Mgmt.
What is the Supply Chain Management Operations Reference (SCOR Model)?
2 of 3 elements
1. Plan: Properly balance demand and supply
- Determine demand requirements.
- Assessing the ability of the suppliers to supply resources.
- Planning the inventory levels, distribution of it, and the purchases of raw materials.
- Making make/buy decisions.
- Assessing capacity concerns and capabilities.
2. Source: Next produce the resources and manage the infrastructure
- Select Vendors.
- Obtain vendor feedback and certification.
- Overseeing and obtaining vendor contracts.
- Collecting and processing vendor payments.
- Ordering, inspecting, and storing inputs to the production process.
- Overseeing the quality assurance process.
- Assessing vendor performance.
3. Make: Turn the raw materials into finished products
- Managing the production process.
- Implementing changes.
- Requesting products for use.
- Manufacturing the product.
- Testing the product.
- Packaging the Product.
- Releasing inventory for shipment.
- Maintaining the production equipment and the facilities.
- Performing quality assurance measures.
- Scheduling Production Runs.
- Analyzing capacity availability.
4. Deliver: Getting the finished products into the hands of the customer
- Managing Orders.
- Forecasting.
- Pricing.
- Managing Transportation.
- Managing AR and Collections.
- Shipping.
- Labeling.
- Scheduling Installations.
- Delivering the Inventory per distribution channels.
What are the Benefits of implementing supply chain mgmt.?
3 of 3 elements of Supply Chanin Management
- Reduce cost in inventory mgmt. and warehousing.
- Optimization of the distribution network and facility locations.
- Enhance revenues.
- Improved service times.
- Strategic shipment consolidation.
- Reduced cost in packaging Improved delivery times.
What is trade credit?
- Is subject to risk of buyer default.
- Is an important source of financing for small firms.
- Is an expensive source of external financing.
Tangible Asset Valuation Method
What is the Cost Method?
1 of 4 Tangible Valuation Methods
Value of the asset is based on the cost actualy paid.
Tangible Asset Valuation Method
What is Market Value Method
2 of 4 Tangible Valuation Methods 2 different ways
-
Net Realizable Value
Under the net realizable value method, the company would recognize the price at which the inventory could be sold to market participants less any costs associated with shipping.
Selling Price - Cost to Sell -
Replacement Cost
All cost associated with replacing property.
Cost to replace the asset + assembly and transportation cost
Part of the Market Value Metod above
What is the Replacement or Reproduction cost method for intangible assets?
All cost associated with acquiring the asset except for general operational cost:
- Legal fees $350,000
- Materials and labor $495,000
- Overhead $75,000
- Production costs $3,900,000
- Development costs $1,250,000
- Opportunity costs $130,000
Tangible Asset Valuation Method
What is Appraisal Method?
3 of 4 Tangible Valuation Methods
Determined by a professional Appraiser.
Tangible Asset Valuation Method
What is Liquidation Method?
4 of 4 Tangible Valuation Method
Sale price in active market.
What is Market Approach?
M IC 1 of 3 Intangible Asset costing method
Market Approach Basis
- Value of a simlar item in a similar market.
- Median market value is removing outlier values than taking the average of the middle two in the range.
- Mean is taking the average of the entire range.
Patent method
What is the Income Approach
M I C 2 of 3 Intangible Asset costing method
PV=Annual CF x Discount Factor
- Use if you have reliable estimates of income or cash flows pertaining to the intangible assets.
Intellectual property method
What is the Cost Approach?
MI C 3 of 3 Intangible Asset costing method
All cost excluding sunk cost.
- Use when limited intangible asset transactions exist and there are no reliable estimates of income/cash flows.
- Use a Replacement or Reproduction cost methodology.
Sunk cost do not impact the value of the intellectual property.
Intellectual property method
What is historical cost?
Intangible Asset costing method
B/S value LIFO/FIFO.
What is single bond’s price date of purchase (PV)?
PV of a bond
(Coupon for each year x applicable PV factor) + Principal x PV)
