Introduction
The easiest way to visualize inventory is by imagining money sitting in warehouses, on shelves in stores, in the backs of trucks, in containers at ports and so forth. Depending on the purpose and business of the company, inventory might be a significant asset on the balance sheet (Jacobs & Chase, 2011).
The U.S. Census reported that the inventory to sales ratio was estimated at 1.31 for all businesses as of February 2014, which means that organizations have 31% more inventory than needed to cover their sales (U.S. Department of Commerce, 2014). Another statistic indicates that holding inventory, on average, costs a U.S. business about 30% to 35% of that inventory’s worth. Altogether, inventory of businesses was worth $1.7 trillion in February 2014 (U.S. Department of Commerce, 2014), and therefore cost them a half-trillion dollars. However, when thinking about inventory, not only the obvious holding costs are to be taken into account, but also the cost of production changes, cost of ordering and costs shortages in inventory may pose to the business (Jacobs & Chase, 2011).
Seeing the worth of inventory itself and the cost associated with it, inventory management poses an important field of consideration for organizations and their managerial accounting. This paper is meant to define inventory management, show its importance as well as advantages and disadvantages. Furthermore, we will introduce businesses providing inventory management services and systems to organizations, and the industries that require inventory management. To get a broader view, we will also discuss whether or not federal, state, and local governments should have inventory managements and what keeping inventory in other locations implies for insura...
... middle of paper ...
...oads or military supplies. Governments have started using inventory management systems to improve their balance sheets, and they should continue to do so for efficiency and cost saving purposes especially in a time where the federal government, states, and communities are fighting debt.
Lastly, inventory management can impose challenges, such as proper processing of items if the company operates in multiple locations. A company must set forth internal control systems and safety measures to keep track of their stocks as well as items they keep but sell on behalf of others, given the large values associated to them.
Overall, with proper inventory management and the use of provided systems and solutions, organizations in all areas of operation will be able to maintain reasonable amounts of stock and keep track of their items while remaining efficient and saving cost.
As a retailer and a supplier, Sobeys has an extremely large balance in their inventory account. During 2015, the inventories are more than 50% of the total current assets, and 13% of the total assets. We will compare the inventory accounts of 100 randomly chosen locations out of the 258 locations, as well as the 3 Cash & Carry stores. The company’s main portion of the total inventories would be food related, and they have certain shelf lives. If the unsold inventories are sitting in the warehouse for too long, then the inventory will be unable to sell, and this brings risk to future revenues. So the company should monitor the entire food related inventory, and strictly follow the FIFO rule. We need to compare the average inventory on hand ratio to other competitors in the same industry to find out if the inventory control has serious issues. Also, inquire inventory evaluation at the warehouses and possibly observe a test count done by
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
Clear Lake Hospital is a not-for-profit hospital in Iowa. It operates 230 beds and provides acute care. The area, which the hospital is located, is a summer destination with vacation homes and fishing activity. The hospital carries more than 10,000 different items of inventory. These items have different price, order lead times and stockout costs. The new hired Chief Financial Officer, Julio Ruiz, believes that the system used for maintaining the inventories results carrying excess inventories. He bases his assumption on the fact that when the hospital faced occupancy rates near to 100 percent, incidents or even possibility of stockout did not occur.
In the retail stores, managers are complaining of frequent stock outs even though the DC is full of merchandise, which is not moving enough through the supplier, DC, and retail stores. The inventory issue also ties in with transportation problems where accurate lead and delivery times are non-existent. The inventory turnover is not at its full potential because if the DC has merchandise yet the stores are stocked out, the inventory is frozen and will become obsolete.
Rondo's Inventory Ratio declined to 9.5 in 2005, down from a ratio of 10 in 2003 and 2004. Rondo's sales improved year-over-year and the decline in inventory turns may be the result of carrying more inventory in response to increased sales. However, Rondo is still carrying too much inventory or the company may have excess obsolete inventory. Rondo needs to utilize just-in-time methods to improve inventory turn over. (Nice catch.) Carrying fewer inventories is required to improve efficiency and reduce cost. Rondo's performance is poor in this area.
The inventory turnover decreased from 3.8 to 3.59. This is explained by the higher increase in the average inventory (37%) than the increase in cost of sales (29%) during 2005. This means that the rate at which inventory is sold is dropping
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).
... inventory turnover was found to be very low. The low inventory turnover ratio was an indicator of inadequacy, since inventory usually has a rate of return of zero (Inventory Turnover Ratio Interpretation, 2009). It also implied either poor sales or excess inventory. A low turnover rate indicated poor liquidity, convincible overstocking, and obsolescence, but it would have also reflected a planned inventory build-up in the case of material shortages or in anticipation of rapidly rising prices. (Inventory Turnover Ratio Interpretation, 2009) And a rapid and unexplained rise in the number of sales per day in receivables in addition to growing inventories to cover the shortage was noted. The interviewee (Public Accountant) could smell something suspicious which led him for more detailed procedures and proactive investigation at the end of which a fraud was detected.
Launched by Jeff Bezos, the Amazon.com website started in 1995 and is today considered as one of the most prominent retail website on the internet with a record turnover of US$ 14.87 billion in 2007. Jeff Bezos’s intention was to create an internet based company with the most dedicated product portfolio on the internet where customers could find anything they might want. Amazon’s success is based on technology, services and products (Jens et al., 2003).
This report has clearly in detail described the meaning, benefits as well as the need and challenges of the RFID in the supply chain system. While RFID comes with a larger magnitude of benefits than the bar code, it’s an expensive medium and comes at a price that may be prohibitive to many businesses. On the one hand, RFID is advantageous in different areas of the supply chain and does not require line-of-sight scanning; it helps in labor reduction, enhances visibility of products and processes , and helps in inventory management. On the other hand, RFID is an expensive solution, lacking benchmarks or standards, suffers from some adverse deployment issues, and suffers from major privacy concerns. However with the ultimate aim to see the establishment of item-level tracking which should act to revolutionize SCM practices, RFID is here to stay.
Sethi, S, Yan, H, & Zhang, H. (2005) Inventory And Supply Chain Management With Forecast Updates New York, NY : Springer.
According to Srinidhi and Tayi (2004), companies that are flexible enough and are able to change from a JIT system to a traditional inventory system will have a competitive advantage over other firms who do not switch. In such uncontrollable environments, the major benefit of JIT becomes a handicap with the increase in delivery times and the added data handling and coordination required in such times. This leads to a decrease in quick response time, which ultimately leads to increase in costs to the firm.
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 can enhance the efficiency in operation of the supermarket. Supermarket must ensure that the correct levels of inventory are being maintained throughout the store, and that merchandise is purchased at the best price point as possible. Holding too much inventory on hand generate costs like carrying costs. Whereas having too little inventory on hand makes customers dissatisfied and it leads to declining
The inventory turnover is almost half compared to the industry average, although it managed to increase by 0.3 compared to 2002. The company needs to maintain a constant cost of goods sold and at the same time manage inventory more efficiently to maintain market competitiveness. The average collection period also increased slightly to 58 days, three days increase compared to 2002. The company needs to negotiate or persuade on efficient payment methods to customers to decrease the collection period down to industry average. The total asset turnover increased 0.1 to 1.6 but still failing to meet the industry standard of 2.0. Martin Manufacturing needs to boost sales while maintaining a constant asset value to meet or exceed industry standards.