Chapter 16-Inventory and Operations Management
Functions of management
1) Planning 2) organizing 3) staffing 4) directing 5) controlling
physical inventory
A count of all the inventory being held for sale at a specific point in time (periodic inventory)
How to get greatest Benefit from Outsourcing
1) Know yourself 2) Keep strategy decisions in-house 3) Fully specify tasks that are to outsourced 4) Know with whom you are contracting
Using receivables to obtain financing
1) Pledge receivables as collateral for a loan 2) Sell receivables to lender through factoring
Disadvantages of leasing
1) Usually costs more than purchasing 2) Subject to numerous restrictions on how they may be used, maintained, and disposed of
Accounting methods to value capital assets
1) book value 2) disposal value 3) replacement value 4) fair market value
Determining appropriate amount of inventory
1) cost of processing an order 2) cost of keeping merchandise in inventory 3) cost of lost sales if you run out 4) time it takes to receive inventory after it's ordered
Types of feedback
1) informational-> info about the processes of your business 2) corrective-> comprises a value judgement about processes and behavior (inefficient processes or negative employees) 3) reinforcing-> rewarding efficient processes and desired employees
Disadvantages of renting
1) no ownership position 2) cannot use asset for collateral 3) required to make payments 4) number of dollars paid in rent usually exceeds the number of dollars you would spend to own the asset (owner of property charges premium to account for risk)
Benefits of leasing
1) usually obtain low down payment 2) process of negotiating and closing lease is less complicated and expensive than purchase and obtaining borrowed funds 3) Usually easier to replace leased assets compared to owned assets
rate of return on investment (ROI)
=(average annual profits)/(average investment)
productivity ratio
=(outputs)/(inputs) how well does firm use inputs to create outputs
capital lease
A lease in which at the end of the lease period the asset becomes the property of the lessee, possibly with an additional payment
economic order quantity
A statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost
Pros and Cons of offering credit
Pros: increased repeat business (higher sales revenue), reduces cost of selling (cheaper to obtain repeat business than to gain new customers) Cons: delay in receipt of cash, usually have to borrow to replace missing cash which is expensive, risk not receiving money
cost of operating
The direct cost incurred in using an asset for the purpose for which it was intended (training to use it, energy consumed, loss of value from obsolescence)
acquisition cost
The total cost of acquiring an asset, including costs such as purchase price, transportation, installation, testing, and calibrating in order to ready it for its first productive use
best practices
activities identified by authoritative bodies as examples of optimal ways to get things done in a particular industry, profession, or trade
safety stock
amount of inventory carried to ensure you will not run out of inventory because of fluctuating sales
optimum stock level
amount of inventory that results in the minimum cost, when considering the cost of lost sales resulting from running out of stock, number of units sold per day, number of days to receive inventory
payback period
amount of time it takes a business to earn back the funds it paid out to obtain a capital asset
capital assets
assets that are expected to provide economic benefits for periods of time greater than one year
efficiency
comparison of productivity ratios to see the extent that an organization has generated more outputs and fewer inputs
cost of owning
cost incurred in financing, insuring, taxing or tracking an asset
cost of disposition
cost incurred in the activities necessary to get rid of an asset
Inventory valuation
determination of the amount of assets held by the firm for sale or production
Accounts Receivable
money owed to your business by customers who purchased your product on credit
disposal value
net amount realized after subtracting costs of getting rid of asset (selling, disassembly, shipping,etc.) from its selling price
Outsourcing
obtaining a needed business process from a firm that is independent of the entrepreneur's business
bar coding
obtaining a universal product codenumber and scan-ready visual tag, and printing it on the product to help with perpetual systems
periodic inventory
process of physically counting business assets on a set schedule
operations
process of transforming materials, labor, and energy into goods or services
quality
product's or service's fitness for use (durability, reliability, serviceability, and dependability)
inventory
products that are held for sale to customers
whole of life costs
sum of all costs of capital assets, including acquisition, ownership, operation, and disposal
perpetual
system of recording the receipt and sale of each item as it occurs
factoring
selling the rights to collect A/R to an entity outside your business
outputs
service or product that is produced for sale
total cost of inventory
1) cost to buy inventory 2) cost to store, protect, and maintain inventory 3) cost of making an order to purchase inventory
Advantages of renting
1) exact amount and timing of cash outflows specified in rental contract 2) renting provides a fall-back position should projections prove to be incorrect (ie return property, restructure payment contract)
book value
difference between original cost and the total amount of depreciation expense
operating lease
long-term rental in which ownership of the asset never passes to the person paying for the lease
equipment
machinery, tools, or materials used in the performance of the work of the business
inputs
materials, labor, and energy put into the production of a good service
microinventory
purchse of inventory only after a sale is made; typical with internet firms
JIT
reduce inventory levels to minimum by accepting inventory only as it's sold, assemble product in minimum time, and shipping product to customer immediately upon completion
pull-through system
term for JIT inventory in which product is ordered and placed into production after sale is completed
replacement value
the cost incurred to replace one asset with an identical asset
Supply chain
the line of distribution of a product from its start as materials outside the target firm to its handling in the target firm to its handling by sellers into the hands of the customers
replacement cost
total cost of replacing an asset with an identical asset
Joint venture
formalized partnership between two or more businesses for some specific purpose; useful when each party has limited use of an expensive asset
plant
general term for facilities of a business
property
general term for real estate, but can also be applied as a legal term for anything owned or possessed
fair market value
price at which goods and services are bought and sold between willing sellers and buyers in an arm's-length transaction
feedback
process of communicating within or to the organization about how the outputs worked or were received
capital budgeting
process of deciding among various investment opportunities to create a specific spending plan
pledging receivables
giving a third party legal rights to debts owed your business in order to provide assurance that borrowed money will be repaid
point-of-sale system
hardware and software combinations that integrate inventory management directly into accounting software