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