Analyzing Inventory Turnover Organizations that supply goods and services to consumers all have one thing in common; inventory on hand and a management system to control the flow of goods. Heizer and Render (2014) stated that organizations must determine whether to produce goods or to purchase them and once the decision is made, the organization must then forecast the demand for these products. This function is especially critical in the automobile, hospitality (food & beverage, lodging) and retail industries. Supply and demand are the key components in determining what type of inventory and how much to carry on-hand, but the most expensive part of inventory is the carrying cost, also known as the cost of storing the inventory (Young, …show more content…
According to Scilly (2016), “if a firm has an inventory turnover of 4, it means that they have completely sold out its stock four times over the period being calculated. A higher turnover is better as it means that you are selling a greater amount of merchandise relative to your inventory, which leads to lower storage costs” (p.1). To demonstrate the importance of inventory turnover, I will discuss product turns for the automotive, hospitality, and retail industries. In the automobile industry, inventory turnover is extremely critical to the success for that given organization. This industry calculates the inventory turnover by dividing total revenue (cost of goods sold) by the total inventory (cost of automobiles on-hand) typically for a one year period. The average in the auto-industry is about 10 turns a year on inventory. Meyerson (2011) stated that generally for car companies, the larger the number; the better it is for the corporation. Research supports that Ford had the highest inventory turnover of 17 times a year, while Chrysler had the lowest at just over 5 turns a year. We can conclude that Ford most likely, does not have problems having to discount older inventory to move it, while Chrysler is most likely having to get aggressive with year-end
By lowering selling prices across the board, Opossumtown, Inc. reduced its inventory turnover ratio, cutting the number of days to sell inventory from 174 days to 104 days; that is a 40% improvement. Opossumtown, Inc. also cut the number of days it takes to collect its credit accounts from 68 to 44 days, again that is 35% better than the previous year. The company is able to do this while cutting its debt ratio by 10% and increasing its current ratio by 25%, making it appear more favorable in terms of liquidity. As promising as this may look, this is not the whole picture. Opossumtown, Inc. shows an 11% decline in gross profit as well as operating income ratios, and a 3% decrease on the profit margin ratio. The decline of these ratios is a result of the company’s new strategy of decreasing the selling price and increasing its marketing and selling expenses. Opossumtown, Inc. made some noteworthy advancements with the implementation of its new plan for 2014. However, based on the assessment of the balance sheet, income statement and the ratios, the corporation did not achieve its goal to increase operating income by 6% and net income by 4%. Opossumtown, Inc. was only able to grow its operating income by a little more than half of one percent and net income by
Burns Corporation is an auto corporation that consists of 24 dealerships selling foreign automobiles in the United States. Burns has experienced an increase in their inventory, which is becoming costly and cutting into profits. Inventory costs total approximately 300 million dollars with a 3% finance charge. Recently, however, inventory costs have peaked at 360 million dollars and finance charges have reached approximately 750 thousand dollars monthly. As inventory grows due to misalignment of sales and merchandise ordering, so does the need for more accurate forecasting models. The manufactures have issued a "turn and earn" approach that affects how dealerships will be receiving their inventory. This change states that shipments will be based on inventory. The only way new models will be received is when other models are sold. Burns needs an analysis model that will assist them in future inventory decisions. The development of this model and what is should entail seems to be the main priority.
In particular, a recent Y-O-Y inventory increase belies a misread of increased demand, which means short turn times and trendier inventory that grows stale on the store shelves. This, in turn, means customers are less incented to return to the retailer to check out “what 's new”. This decreases in repeat visits in turn leads to longer inventory turn times, which in turns leads to loss of profit. In short, a revamped Kohl 's that moves inventory more quickly immediately becomes more attractive to the
Various ratios are used in this analysis. The organization’s WIP and FG inventory turnover ratios from 2009 demonstrate that the firm takes fewer days to sell both inventories (3.64 days and 73.43 days respectively) than the average firm in the industry In 2009, the total asset turnover ratio for Gemini Electronics was 1.37 while the industry average was 1. This is an indication that Gemini Electronics is generating business at a steady pace. Gemini Electronics is utilizing its fixed assets at a higher rate than other firms in the industry. Their utilization shows the Gemini’s ability to use L, P, & E in order to generate sales. Gemini Electronics A/R is 40.16, which is 25% higher than the industry average. This means Gemini Electronics waits about 40 days to receive payment for goods sold. High levels of A/R can negatively affect the firm and their stock
This passage should encourage us to never give up. Financial Measures According to Chipotle Mexican Grill, Inc.’s financial ratios, “inventory turnover ratio rose to 202.33, below company average. However, the average processing period stayed unaffected at 2 days, in the Sep. 30, 2015 quarter.” Within the services sector, there was only one business that accomplished a greater inventory turnover ratio.
.... In addition, inventory turnover shows a consistent increase from 2.16 in 2011 to 2.38 and 2.49 for 2012 and 2013 respectively.
Accommodating customer requirements in most supply chain arrangement requires a forecast to drive the process. (book page 133) When looking into the definition of forecasting which is projecting what is going to be sold (units, seats, rooms etc) it is also important to take into consideration where and when in order to reach the future goals. (book page 133) Since it is argued that effective supply chain and logistical capacity is an important competitive advantage. (Christopher 2005) Where maximizing the revenue is the key element in hospitality sector and for hotel industry there is an increased attention on effective demand management and forecasting for reservation systems. (http://www.sciencedirect.com/science/article/pii/S0169207002000110)
Its receivable turnover is 13.4 times per year, which is higher than C-P 10.5. In addition, the average number of days from sale on account to collection for P&G is 27.2 days while for C-P is 34.8 days. Based on the efficiency ratio analysis, P&G’s inventory moves quickly from purchase to sale, which the inventory turnover ratio is 6.2 and the time for the purchased inventories to be on sale is on the average of 58.6 days while C-P’s turnover ratio is 5.2 and the average days to sell is 70.6. This shows that P&G takes a shorter time than C-P to sell their inventories. However, C-P has a higher ability to pay their short-term liabilities, whereby the current ratio is 1.08 as opposed to P&G
The just-in-time (JIT) inventory system was developed in Japan after World War II, in an effort to control costs during fiscally challenging economic times (Waguespack and Cantor, 1996). The challenge that faced many Japanese companies in the post-War era was to find a way to meet the needs of customers and businesses while utilizing as few resources and as little capital as possible. The Japanese developed these set of techniques in order to control production, limit unnecessary products and reinvest the valuable capital left from the savings back into the business structure (Waguespack and Cantor, 1996). Much of the success of many Japanese corporations over the past four or five decades has been was linked to the principles of JIT (Chhikara and Weiss, 1995).
However, first I explained that by establishing an effective inventory management system, Nike would see an improvement within its supply chain and customer demand. First, I explained the replenishment method, and, I voiced my concerns about implementing this. While cost effective, the challenge with the replenishment model is that the product inventory can go from 15 to 0 within the span of a few minutes. Therefore, I could find no good reason to implement this element of an inventory management system. Thus, certain Nike products sell out within minutes of launching, therefore, the replenishment model would not be effective. However, Mark suggested that the joint replenishment component might work. Regrettably, I had to point out that one of the main requirements of this system is that external demand must be met. Consequently, it would not work because Nike would have a difficult time meeting the demands. Thus, Mark agreed and we continued to the next management systems (De Kok, & Inderfurth,
Another consideration is the big franchised dealers have an insatiable desire to shift large volumes of new stock with a bewildering array of special offers and discounts. This has the inevitable ‘k...
Sethi, S, Yan, H, & Zhang, H. (2005) Inventory And Supply Chain Management With Forecast Updates New York, NY : Springer.
Inventory management is a method through which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle of the demand forecasting, supply chain management, inventory control and reverse logistics. Inventory management is the optimization of inventories of manufactured goods, work in progress, and raw materials. According to Doucette (2001) inventory management can be challenging at times; however, the need for effective inventory management is largely seen more as a necessity than a mere trend when customer satisfaction and service have become a prime reason for a business to stand apart from its competition. For example, Wal-Mart’s inventory management is one of the biggest contributors to the success of the company; effective and efficient inventory management is of critical importance.
Inventory management is defined because a science mostly established art of guaranteeing that just enough inventory share is command with a company to fulfill demand (Coleman, 2000; Jay & Barry, 2006). it's mostly regarding specifying the size and keeping of stacked product. Inventory management is usually needed at completely distinct spots within a service or within multiple spots of a supply network to guard the standard and planned course of production up against the random disruption of running low upon materials or product. The scope of inventory administration also concerns the good lines between replenishment period interval, carrying costs of inventory, asset management, investment forecasting, inventory valuation, selection visibility,
Inventory Management has developed as an important fact in organizational efforts to reduce losses. The management of capital within an organization has a significant impact towards profits where inventories are commonly an organization’s largest asset. Inventory Management behaviors impact the sales forecast, operation and sales planning, production planning, inventory rotation and material requirement planning.