APICS BSCM (4/4): Supply 'Lesson 1' - Aggregate Inventory Mgmt.

Carrying Cost Exam Q's

you may have an example where the carrying cost percentages Copyright © 2014 Accenture. All rights reserved. You may only use and print one copy of this document for private study in connection with your personal, non-commercial use of an Accenture Academy course validly licensed from Accenture. This document, may not be photocopied, distributed, or otherwise duplicated, repackaged or modified in any way. Note: Interactive elements such as activities, quizzes and assessment tests are not available in printed form. Transcript 4 © Accenture Academy are only given in a couple of the different cases. So for instance, instead of getting the capital costs, the storage costs, and the risk costs, you might just be given the capital and the risk costs. If that's the case, just add those together and that becomes your carrying cost percentage

Carrying Cost Answers

1) Carrying Cost % = 7+8+8 or 23% 2) 23% of 4,000,000 = $92,000 carrying cost

Carrying Cost Examples

1) If a company has capital costs of 7%, storage cost of 8% and risk costs of 8% what is carrying cost percentage? 2) If their average inventory is $4,000,000 what is their carrying cost?

Inventory Turns good/bad

5 Inventory Turns/yr Is this good or bad? If mfg. Capital Equip it is high If mfg. rapid moving Consumer Product, it is low Dependent on industry

Calculating Carrying Cost

= carrying cost of inventory x average inventory

Days of Supply Formula

= inventory on hand / average daily use

Aggregate Inventory Management

A grouping of inventory Business strategy driven (if business strategy is having stock to ship, you need more inventory) Financially Oriented (only keep $x of inventory at any time) Customer Service, inventory investment & production (costs less to have inventory than to not have it for CS concerns)

Current Liabilities

Accounts Payable, Short-term notes payable, rents

Inventory Turns Formula

Annual COGS / Average Inventory ($)

Inventory Turns Example

Annual COGS: $10 million Average Inventory: $2 million

Days of Supply - Example

Annual Sales: 100,000 units Days/Year: 365 Units on Hand: 12,000 What is days of supply?

Functions of Inventory (6)

Anticipation Fluctuation Lot Size Transportation/Pipeline Hedge Buffer

Balance Sheet Parts (3)

Assets Liabilities Owner's Equity

Owner's Equity

Assets - Liabilities

Days of Supply Example - Answer

Average Daily Usage = 100,000/365 = 274/day 12,000/274 = 44 Days of Supply

Average Cost

Average of the sum of costs over a long period of time Used in situations where there is not much changes in costs over time.

Hedge Function

Buildup due to unforeseen events If a product has volatile supply or pricing, you buy enough to protect yourself

Carrying Costs (#2)

Capital Costs, storage Costs, risk costs

Ordering costs in production

Cost of Setup and Changeover

Stockout Costs (#4)

Cost of backorders, lost sales, expediting Hard to quantify b/c of lost sales/customers

Storage Costs

Costs to keep the inventory in place and safe

Cost of Goods Includes

Direct Materials used to support production, Direct labor (in factory producing products) Overhead (supplies, utilities, factory supervision)

Long Term Assets

Equipment, Facilities, Technologies

Item Inventory Management

Establish decision rules about individual inventory items. How much you control, order and when to order

Inventory Valuations (4) **not physical movements**

First-In, First-Out (FIFO) Last-In, First-Out (LIFO) Average Cost Standard Cost Different methods b/c of tax implications

Transport/Pipeline Function

In transit Anticipating lead times while in transit

Risk Costs

Insurance, Obsolesence, Pilferage, Damage, anything that puts the product at risk of unsellable

Inventory Turns Example - Answer

Inventory Turn = $10m / $2m = 5 Turns per year

Inventory Performance Measures (2)

Inventory Turns Days of Supply

First-In, First-Out (FIFO)

Inventory that comes in first is the first that is valued as part of COGS. Does NOT mean that product that physically came in first is a product that physically moves out to prod. floor.

Current Assets (examples)

Inventory/Accounts Receivable

Inventory Costs (5)

Item Carrying Ordering Stockout Capacity

Inventory includes

Items used to support production including raw materials, components, and work and process. Finished goods + Repaire Parts

Capacity Costs (#5)

Overtime, Lack of Work, Hiring, Training. Based on too much work for capacity or not enough work for capacity.

Anticipation Function

Peak Seasons/Promotions If your peak season is spring, you build your inventory in winter

Functional Responsibility of Scheduling

Plans and controls flow of inventory

Lot Size Function

Produced/Purchased in lots certain inventory has to be produced/purchased in lot size amounts

Cash flow analysis

Product d/n generate revenue until sold Even when sold, may still be accounts receivable ie. Customers pay in increments of 30, 60, 90 days. Won't have $$$ immediately

Ordering costs in purchasing

Purchasing Salaries, expenses associated w/ purchasing (travel, etc...

Decisions with Owner's Equity (2)

Re-Invest Pay Dividends combination of both

Lesson Summary

Recognize 5 groups and elements of inventory Understand functions of inventory Understand aspects of a balance sheet vs. income statement Understand inventory valuation and supply measurements

Functional Responsibility of Maintenance

Responsible for MRO

Fluctuation Function

Safety Stock Protects against uncertain demand

General Admin Expenses

Sales people, accounting, supply chain personnel

Functional Responsibility of Distribution

Stores and ships inventory

Maintenance Repair & Operating (MRO)

Supplies are considered a form of inventory Taxed different, expensed to individual departments **not calculated in inventory turns

Last-In, First-Out (LIFO)

The product you receive last is valued first. The product you received most recently is valued to the COGS.

Balance Sheet Summary

What you own What you owe What's left over

Inventory is considered _____

a current asset

Purchase (items) cost

cost to purchase the item plus the incoming freight

Manufactured (items) cost

include your direct materials and labor to produce an item.

Buffer

kept at different points in production Protects bottlenecks

Item Inventory Costs (#1)

Manufactured or Purchased Cost

Functional Responsibility of Production

Manufactures inventory

Long-Term Liabilities

Mortgages, Long-Term Notes

Standard Cost

Most common form of valuation A standard is set (usually per year) and you value inventory at that standard Any purchase/ manufacture/ product made is considered a purchasing or manufacturing price variance

Importance of Cash Flow analysis

Need liquid cash to pay bills Important to know when that is coming in for financial health

Ordering Costs (#3)

OC in production and purchasing

Functional Responsibility of Purchasing

Obtaining inventory and MRO

Capital Costs

Opportunity or financing costs