chp 20. ar and inventory management

8/6/2019 Chp 20. AR and Inventory Management

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Billy Leon P. |Hesty Oktariza | Trinh Quang Tan (Neww)

ACCOUNTS RECEIVABLE ANDACCOUNTS RECEIVABLE ANDINVENTORY MANAGEMENTINVENTORY MANAGEMENT


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Percent of Credit Sales to Total Sales

Level of Sales

Credit and collection policies;

Terms of Sale

Quality of Customer

Collection Efforts

Size of Investment inAccountReceivables


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Annualized opportunity cost of foregoing a

discount:

Opportunity cost of foregoing 3/30 net 60:

= 37.11%

Term of Sale


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The numerical credit evaluation of each candidate

Credit Scoring


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EdwardAltman model


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The key to maintaining control over the

collection of accounts receivable is the fact

that the probability of default increase withthe age of the account

Collection Effort


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One common way of evaluating the current situation

is ratio analysisratio analysis.

Examining the average collection period

Ratio of receivables to assets

Ratio of credit sales to receivables (accounts

receivable turnover ratio) Amount of bad debts relative to sales over time

Aging of accounts receivable schedule

Collection Effort


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Credit Policy Changes

When is it appropriate for a firm to change its credit

policy?

Three categories of changes in credit policy that afirm can consider:

A change in the risk class of the customer

A change in the collection process

A change in the discount terms


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How to evaluate the situation?

Four steps for performing marginal analysis on achange in credit policy:

Step 1: Estimate the change in profitStep 2: Estimate the cost of additional

investment in accounts receivable andinvetory

Step 3: Estimate the cost of discountStep 4: Compare the incremental revenues

with the incremental costs


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Credit Policy Changes and Profit


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INVENTORY M

ANAGE

MENT


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The purpose ofcarrying inventories

is to uncouple the

operations of the

firm.

Types ofInventory

RawMaterialsInventory

Work-In-Process

Inventory

FinishedGoods

Inventory

Stock ofCash

Inventory Management


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Trade-Off in Investment Inventory

Too much inventoryis expensive and

wasteful.

Not enough inventorycan result in lost sales


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Inventory Management Techniques

y In order to effectively manage the investment in inventory,

there are two problems must be dealt with:

a) Order Quantity Problem

b) Order Point Problem


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TotalOrdering

Cost

TotalCarrying

Cost

TotalInventory

Cost

Economic Order Quantity (EOQ) ModelEconomic Order Quantity (EOQ) Model

Determining Optimal Inventory (where total costs are

minimized)


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Carrying CostsCarrying Costsy Warehouse rent

y Insurance

y Security costs

y Utility costs

y Maintenance costs

y Property taxes

y Move and re-arrange,

obsolescence, andy Opportunity cost, i.e.,

using cash for profitable

projects rather than being

tied up in inventory

Av r g

I v t ry

C rryi g

C st p rU it

Q

2

Q

2

C

Wh r :

Q = th i v t ry siz (i u it)

C = C rryi g c st p r u it

Inventory Cost


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TimeTime

OrderQuantity

Q

InventoryInventoryLevelLevel

(units)(units)

The EOQModelassumes the firm orders

a fixed amount (Q) at

equal intervals.


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TimeTime

OrderQuantity

Q


(units)(units)

Average inventory = Order Quantity2

The EOQ ModelThe EOQ Model


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Carrying Costs

Order Size (units)Order Size (units)

CostCost($)($)

Carrying costs increase

as the size of the

inventory increases.



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OrderingOrdering CostsCostsy Clerical expense

y Telephone

y

Material ResourcePlanning (MRP)

system

y Receiving cost

Number

ofOrders

Ordering

Cost perorder

S

Q

S

Q

O

Where :

Q= the inventory size (in unit)

S = total demand in units over planning

period

Inventory Cost


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CostCost($)($) Ordering Costs,Ordering Costs, per unitper unit

Ordering costs per unitgo down as order size

increases. Assumes ordering

costs are relatively fixed.



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TotalTotal Cost =Cost = QQ x Cx C ++ SS xx OO22 QQ


CostCost($)($)

Carrying Costs = ( ) CQ2

= ( ) OSQ

Ordering CostsX

Y

The economic order quantity is the

intersection of the X and Y points

where total inventory cost is

minimized



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a. Order Quantity Problem (contd)

y The ordering quantity that minimizes the totalcosts of inventory.

Determining Optimal Inventory

Q* =2 SO

C


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Example:Example:Awesome Autos expects to sell 1,560 new automobiles in thenext year. It currently costs $40 per order placed with themanufacturer. Carrying costs amount to $50 per auto.a. How many autos should they order each time they place an

order?

=

= 49.96 } 50 cars

2(1560)4050

b. How many orders per year? How much does it cost?

Q = autos in each order Order/year= S/Q = 1,560/ 50 = 31.2 orders eachyear Ordering cost = 31.2 x $40 = $1,248

a. Order Quantity Problem (contd)


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Basic Assumptions in EOQ

1. Constant unit price regardless of amountordered.

2. Constantc

arryingc

osts per unit.3. Constant ordering costs per order regardless of

the size of the order.

4. Instantaneous delivery.

5. Constant or uniform demand

6. Independent orders.


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TimeTime

OrderQuantity

Q


(units)(units)

The EOQModelassumes the firm orders

a fixed amount (Q) at

equal intervals.


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b. Order Point Problem

Order PointOrder Point

The quantity to which inventory must fall in order to

signal that an order must be placed to replenish an

item.

How low inventory should be depleted before it isHow low inventory should be depleted before it is

reordered?reordered?

When to order?When to order?


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b. Order Point Problem (contd)

y Safety Stock

Inventory held to accommodate anyunsually large and unexpected usage during

delivery time.

y Delivery Time Stock

The inventory needed between the orderdate and the receipt of the inventoryneeded.


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Order newinventory when

the level ofinventory falls

to this level

SafetystockDelivery-time stock

*Delivery*Delivery--time stocktime stock = Delivery Time= Delivery Time X Daily usageX Daily usage


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AverageAverage EOQEOQInventoryInventory 22= + safety stocksafety stock


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Inventory Management with Safety Stock-

Order

EOQ

Depleted Stock

During Delivery

Inventory Order PointInventory Order Point

Actual Delivery Time

SafetyStock

TimeTime


(units)(units)

20

50

70


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What is the proper amount of safety stock?What is the proper amount of safety stock?

y Amount of uncertainty in inventory demand

y Amount of uncertainty in the delivery time

y Eficiency of inventory replenishment system

y Cost of running out of inventory

y Cost of carrying inventory

DependsDepends on the:on the:


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Objectives

Determining Optimal Inventory

to determine the order size that will minimize total

inventory costs.

where Q*= the optimal order quantity in units

O = ordering cost per order

S = total demand in units over the planning

period

C = cost of carrying 1 unit in inventory

2SO

C

Q* =


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Just-In-Time Inventory Control

y JIT System is one link in Supply Chain Management

(SCM)

y The objective of JIT System is to cut down the

inventory at the minimum level, and the time and

physical distance between the various production

operations also minimizedy How about Just-In-Case System?


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TOTAL QUALITY MANAGEMENT


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Total Quality Management (TQM)

yy What is TQM?What is TQM?

yy Why TQM are needed?Why TQM are needed?

yy The Financial Consequences of QualityThe Financial Consequences of Quality--TheTheTraditional ViewTraditional View

yy The Financial Consequences of QualityThe Financial Consequences of Quality-- TheThe

TQM ViewTQM View


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The Financial Consequences ofQuality-The Traditional View

Preventive Cost

Cost resulting from design and production efforts on the part of

the firm to reduce or eliminate defects

Appraisal Cost

Cost of testing , measuring, and analyzing to safeguard againstpossible defects going unnoticed

Internal Failure Cost

Cost associated with discovering poor-quality products prior to

delivery (reworking the product, downtime cost, discounts)

External Failure Cost

Cost resulting from a poor-quality product reaching the

customers hand (warranty product, recall product, lost sales

cost)


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The Financial Consequences ofQuality- The TQM View

y The TQM view argues that higher quality will result in

increased sales and market share

y In fact, by use TQM model it can drop manufacturing

cost significantly


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chp 20. ar and inventory management

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