Unit5InventoryControl.docx

Unit5InventoryControl.docx

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Unit5InventoryControl

UnitFiveInventoryControl

PartoneTextInventoryControl

Inventorycontrol,otherwiseknownasstockcontrol,isusedtoshowhowmuchinventoryyouhaveatanyonetime,andhowyoukeeptrackofit1.

Itappliestoeveryitemyouusetoproduceaproductorservice,fromrawmaterialstofinishedgoods.Itcoversinventoryateverystageoftheproductionprocess,frompurchaseanddeliverytousingandre-orderingtheinventory.

Efficientinventorycontrolallowsyoutohavetherightamountofinventoryintherightplaceattherighttime.Itensuresthatcapitalisnottiedupunnecessarily,andprotectsproductionifproblemsarisewiththesupplychain.

Whatareinventories?

Inventoriesareoftenalsoknownasstocks.Theyareanythingwhichafirmhaswhichisnotcurrentlybeingusedforoneofthefirm'sfunctions.Mostdepartmentsinthecompanywillhaveinventoriesofsomething.Thefactorymayhaveinventoriesofrawmaterialsreadytoproduce,theofficemayhaveinventoriesofstationeryandthewarehousemayhaveinventoriesoffinishedgoods.

Inventoriesarevitaltoacompanytohelpitfunctionsmoothly.Ifproductionhadtobestoppedeverytimethefirmranoutofrawmaterials,thetimewastedwouldcostthefirmafortune2.Ifashophadnoinventoryontheshelves,customerswouldsoondesertthem.Thesameistrueofmostareasthefirmoperatesin—Iamsureyoucanappreciatetheimportanceofplanningaheadandhavingsuitablelevelsofinventories.

Inventoriesareconsideredtobecurrentassets（theothercurrentassetsaredebtorsandcash）becausemanytypesofinventoriescanbeconvertedintocashreasonablyreadily—particularlyinventoriesoffinishedgoods.However,theyaregenerallytheleastliquidofthecurrentassets3.Attimesofrecessionorsimilaritmaybeverydifficultforthefirmtosellinventories,andsoalthoughtheymaybelistedasacertainvaluetheirtruevaluemaybelower.

Typesofinventory

Managinginventoryeffectivelyisimportantforanybusiness,becausewithoutenoughinventories,productionandsaleswillgrindtoahalt.Inventorycontrolinvolvescarefulplanningtoensurethatthebusinesshassufficientinventoryoftherightqualityavailableattherighttime4.

Inventorycanmeandifferentthingsanddependsontheindustrythefirmoperatesin.Itincludes:

•Rawmaterialsandcomponentsfromsuppliers

•Workinprogressorpartfinishedgoodsmadewithinthebusiness

•Finishedgoodsreadytodispatchtocustomers

•Consumablesandmaterialsusedbyservicebusinesses

Inordertomeetcustomerorders,producthastobeavailablefrominventory–althoughsomefirmsareabletoarrangedeliveriesJustinTime（seebelow）.Ifabusinessdoesnothavethenecessaryinventorytomeetorders,thiscanleadtoalossofsalesandadamagedbusinessreputation5.Thisissometimescalleda‘stock-out’.

Itisimportantthereforethatabusinesseitherholdssufficientinventoriestomeetactualandanticipatedorders,orcangetinventoriesquicklyenoughtomeetthoseorders6.Forahighstreetretailer,inpracticethismeanshavingproductontheshelves.

However,therearemanycostsofholdinginventory,soabusinessdoesnotwishtoholdtoomuchinventoryeither.

Costsofinventory

Apartfromtheactualcostofbuyinginventoryinthefirstplace,theremaybeanumberofothercostslinkedtoinventory.Toomuchinventorycanleadto:

•Moneybeingtiedupintheinventory,whichcannotbeusedforotherpurposesuntiltheinventoryissold.

•Possiblecashflowproblemsmayresultfromthis.

•Increasedstoragecosts,suchasheating,lighting,refrigerationandinsurance.

•Possibleincreasedwastageofinventories.

Toolittleinventorycanleadto:

•Idleworkersandmachines,andthereforelostoutputwhilewagesandothercostsstillhavetobepaid.

•Ordersarelostifdeadlinescannotbemet.

•Poorrelationswithcustomers,resultingfromdelaysindeliveries.

•Lossofreputationandgoodwill.

Thecostsofholdinginventoryinclude:

•Theopportunitycostofworkingcapitaltiedupininventorythatcouldhavebeenusedforanotherpurpose.

•Storagecosts–therent,heating,lightingandsecuritycostsofawarehouseoradditionalfactoryorofficespace.

•Bankinterest,iftheinventoryisfinancedbyanoverdraftoraloan7.

•Riskofdamagetoinventorybyfire,flood,theftetc;mostbusinesseswouldinsureagainstthis,sothereisthecostofinsurance.

•Inventorymaybecomeobsoleteifbuyertasteschangeinfavourofneworbetterproducts.

•Inventorymayperishordeteriorate–especiallywithfoodproducts.

Inventorycontrolmethods

Inventoriesmaybeheldforavarietyofreasons.Theymaybeinventoriesofrawmaterialsreadyforproduction,theymaybework-in-progress（productionpartwaythroughtheproductionprocess）ortheymaybeinventoriesoffinishedgoods.Whichevertheyareitisvitalforthefirmtocontrolthelevelofinventoriesverycarefully.Toolittleandtheymayrunintoproductionproblems,buttoomuchandtheyhavetiedupmoneyunnecessarily.

Themaintheoriesaboutinventoriesthenaretodowithinventorycontrol.Therearevariousdifferentwaystoapproachinventorycontrol:

•Fixedre-orderinventorylevel

•Fixedtimere-ordering

•Economicorderquantity

•Just-in-time

Fixedre-orderinventorylevel

Thismethodofinventorycontroliswhereabusinessdecidestheminimumlevelofinventoriesitcantolerate8,andthenre-ordersbeforetheinventoriesreachthislevel.Theexacttimingwilldependhowlongtheinventoriestaketoarrive9.Thiscanbeillustratedasfollows:

Thedistancebetweenthere-orderlineandtheminimuminventoriesleveldependshowlongitmaytakefortheordertoarrive—thistimeisknownastheleadtime.

Fixedtimere-ordering

Thismethodisexactlyasitstitlesuggests.Thefirmre-ordersinventoriesatafixedtimeeachmonthorweek.Itcanofferagoodsolutionasitrepresentsaroutineforthefirmandensuresthatinventoriesareregularlysupplemented10.However,itmaywellmeanthelevelofinventoriesfluctuatingquiteabitdependingontheratetheyareusedup11.Itisalittleinflexibleasasystemaswellunlessusedverycarefully12.

Economicorderquantity

Foranycompanythereisanoptimumlevelofinventories.Thepreciselevelofthiswillvaryindifferentfirmsandindustries.Theyhavetobalancethecostsofholdinginventories（thespacetaken,themoneytiedupetc.）withthecostsoforderinginventory13.Themorefirmsorderatonce,thebetterthedealtheywillusuallyget.

ThelevelofinventoriesthatstrikesthebalancebetweenthesetwothingsisknownastheEconomicorderquantity14.Ifthisistakentobetheoptimumlevelofinventoriesitshouldhelptominimizethefirm'scosts—animportantpre-requisitetomaximizingprofit.

Just-in-timeproduction

Becauseinventoriescostsomuchtokeep,anothermethodofinventory-controlwasdevelopedinJapanandhasnowbecomemuchmorecommonintheUK.Thejust-in-timemethodinvolveskeepinginventoriestoanabsoluteminimum,andtherawmaterialsareorderedonlywhentheyareneeded.Inotherwords,just-in-time.Thistimeperiodinsomecaseshasbeenreducedtominutesorhours,andtherawmaterialsarriveonsitemomentsbeforetheyareneeded15.

Thiscanbewonderfulforhelpingtoreducetheneedforworkingcapital,butrequiresaveryhighleveloforganizationalskillandaverycloserelationshipwithsuppliers.

Inventoryturnoverratio

Toanalyzeinventoryalittlefurtheritispossibletouseratioanalysis.TheINVENTORYTURNOVERRATIOshowshowmanytimesoverthebusinesshassoldthevalueofitsinventoriesduringtheyear16.Itiscalculatedby:

INVENTORYTURNOVERRATIO=

Costofgoodssold

Inventories

Thehighertheinventoryturnoverthebetter,becausemoneyisthentiedupforlesstimeininventories.Aquickerinventoryturnoveralsomeansthatthefirmgetstomakeitsprofitontheinventoryquicker,andsothefirmshouldbemorecompetitive.However,itwillvarybetweenindustriesandsoitisimportanttocomparewithinanindustry.

Itisalsopossibletoexpresstheratioasanumberofdays,whichissometimesaneasierwaytounderstandit.Todothisusethefollowingformula:

INVENTORYTURNOVERRATIO（indays）=

Inventories

Costofgoodssold

Theresultofthisratiogivesthe"numberofdaysthatonaveragemoneyistiedupininventories".Thelongerthisis,obviouslytheworsethisisforthebusinessasthemoneyisnotavailabletobeusedelsewhere.Sincetheinventoryispartoftheworkingcapitalitisimportantthatitisavailableforusepromptly.

WordsandExpressions:

appreciate[ə'pri:

ʃieit]v.1.befullyawareof;realizefullyfor正确地评价,鉴别;体会,领会,察知2.recognizewithgratitude;begrateful感谢,感激;欣赏,赏识

balance['bæləns]n.equalitybetweenthetotalsofthecreditanddebitsidesofanaccount结存;结余

calculate['kælkjuleit]v.1.makeamathematicalcalculationorcomputation计算2.specificallydesignaproduct,event,oractivityforacertainpublic计划,打算;使适合（某种目的）[+to-v]

consumables[kən'sju:

məblz]n.thingsthatmaybeusedup消耗品

deadline['dedlain]n.thepointintimeatwhichsomethingmustbecompleted截止期限,最后限期;（报纸等的）截稿时间

debtor['detə]n.apersonwhoowesacreditor;someonewhohastheobligationofpayingadebt借方;债务人

delay[di'lei]n.timeduringwhichsomeactionisawaited耽搁的时间;theactofdelaying;延迟;耽搁

delivery[di'livəri]n.theactofdeliveringordistributingsomething（asgoodsormail）交付,交货；投递,传送

desert[di'zə:

t]v.leavesomeonewhoneedsorcountsonyou抛弃;遗弃;离弃

deteriorate[di'tiə