2. Chapter 6 Managing Inventories

3. Management Difficulties  Hard to measure and value  The value may change  Subject to fraud  Hidden costs  Physical count

4. Fraudulent Inventory Practices  Leave higher cost in inventory – sell the cheaper costing product first  Damaged goods labeled as work in progress  Obsolete inventory kept at full cost  Moving inventory and counting twice  Contents of boxes mislabeled

5. Most Inventory Problems  Management buys or produces too much of the wrong merchandise at the wrong price.  Operations Manager’s Job

6. The Operation Perspective  Production Process Continuous production  Raw material is consistent  Little work in progress (no inventory)  But what happens if demand falls  And what happens if demand rises Project production  No finished goods  Immediate delivery  Easily controlled raw materials

7. The Operation Perspective Job-shop production  Product made to order  Short production period Assembly Line Production  Inventory is based on the product

8. The Tradeoffs  Too much inventory means Funds are tied up Storage expenses Handling expenses Damaged inventory Vulnerable to theft Physical Obsolescence (Spoilage) Economic Obsolescence

9. Financial Perspective  Volatile Demand – Greater loss potential Build to order Divide into components (Integrate) Increase capacity when needed

10. Financial Perspective  Seasonal Demand Give incentives for early sales (Dating)  Customer commitment  Warehouse filled with your product and not the competitions  Less storage for your inventory  Less Product handling  Better loan credentials

11. Financial Perspective  Stable Demand Even if seasonal can it be predicted and aligned with production Some products can be stored cheaper than offering incentives Increased demand is usually not a serious problem

12. Financial Perspective  Inventory Reduction Sell the inventory Give away inventory for tax benefit Sell inventory at discount Cut production rate for next year

13. Financial Perspective  Building to order or speculation Avoids work in progress Can offer a build and hold plan  Watch encumbered accounts Get deposit or letter of intent to purchase Make production timelines from realistic sales estimates

14. Managerial Decisions  Offer build and hold instead of discount  Determine how far in advance to produce orders  Sell as a pseudoconsignment  Managing pipeline inventory Understand the initial stocking of new products

15. Inventory Valuation  Average Cost Method  LIFO (Last In First Out)  FIFO (First In First Out)

16. Average Cost Method  Seldom Used  Total cost of goods in inventory are summed and averaged to give a cost of goods value  No real value for this method

17. FIFO  First Inventory purchased is assigned to cost of goods sold  More recent purchases are applied to the inventory values  Decrease cost of Goods  Increase inventory value  Increase profit =higher taxes  Most accurate for real life experience

18. LIFO  Most recent inventory costs become cost of of goods sold  Older purchases are assigned to inventory  Higher cost of goods  Decrease Inventory value  Decrease Profits = lower taxes

19. How they compare UnitsPriceAverageLIFOFIFO First Inventory1000 Second Inventory10001050 Third Inventory10001100 Fourth Inventory10001150 Total Inventory40004300 1075 Sales 1000 @ $1.50$1,500 Cost of Goods107511501000 Gross Profit$425$350$500 Starting Inventory4300 Less COGS107511501000 Ending Inventory322531503300