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