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    BAFINMAX Working Capital Management Inventory

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    Laiza Alforte
    This document provides an overview of inventory management techniques. It discusses just-in-time (JIT) inventory systems which minimize inventory and increase efficiency by receiving goods only as needed. An example is given of Toyota, which perfected JIT over 20 years. It also covers economic order quantity (EOQ), which is the ideal order size to minimize costs like holding and ordering. The module discusses key inventory management methods and provides formulas for calculating ordering costs, holding costs, and EOQ.

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    BAFINMAX Working Capital Management Inventory

    Uploaded by

    Laiza Alforte
    21 views3 pages
    This document provides an overview of inventory management techniques. It discusses just-in-time (JIT) inventory systems which minimize inventory and increase efficiency by receiving goods only as needed. An example is given of Toyota, which perfected JIT over 20 years. It also covers economic order quantity (EOQ), which is the ideal order size to minimize costs like holding and ordering. The module discusses key inventory management methods and provides formulas for calculating ordering costs, holding costs, and EOQ.

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    This document provides an overview of inventory management techniques. It discusses just-in-time (JIT) inventory systems which minimize inventory and increase efficiency by receiving goods only as needed. An example is given of Toyota, which perfected JIT over 20 years. It also covers economic order quantity (EOQ), which is the ideal order size to minimize costs like holding and ordering. The module discusses key inventory management methods and provides formulas for calculating ordering costs, holding costs, and EOQ.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    21 views3 pages

    BAFINMAX Working Capital Management Inventory

    Uploaded by

    Laiza Alforte
    This document provides an overview of inventory management techniques. It discusses just-in-time (JIT) inventory systems which minimize inventory and increase efficiency by receiving goods only as needed. An example is given of Toyota, which perfected JIT over 20 years. It also covers economic order quantity (EOQ), which is the ideal order size to minimize costs like holding and ordering. The module discusses key inventory management methods and provides formulas for calculating ordering costs, holding costs, and EOQ.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    MODULE 4

    WORKING CAPITAL MANAGEMENT

    SESSION TOPIC 1: INVENTORY MANAGEMENT

    LEARNING OUTCOMES:
    The following specific learning objectives are expected to be realized at the end of the session:
    a. Identify items of working capital.
    b. Appreciate the uses of working capital ratios in working capital management. 

    KEY POINTS

    Just in Time Methods Annual Ordering Cost


    Economic Order Quantity Annual Holding Cost

    CORE CONTENT
    Introduction:
    This module covers the discussion of
    a. The concept of Inventory Management.

    IN-TEXT ACTIVITY

    Inventory management refers to the process of ordering, storing, using, and selling a company's
    inventory. This includes the management of raw materials, components, and finished products, as well as
    warehousing and processing of such items.
    For companies with complex supply chains and manufacturing processes, balancing the risks of inventory
    gluts and shortages is especially difficult. To achieve these balances, firms have developed several
    methods for inventory management, including just-in-time (JIT) and materials requirement planning
    (MRP)1.

    Inventory Management Methods


    Depending on the type of business or product being analyzed, a company will use various inventory
    management methods. Some of these management methods include just-in-time (JIT) manufacturing,
    materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory
    (DSI).

    1. The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders
    from suppliers directly with production schedules. Companies employ this inventory strategy to increase
    efficiency and decrease waste by receiving goods only as they need them for the production process,
    which reduces inventory costs. This method requires producers to forecast demand accurately.

    The just-in-time (JIT) inventory system minimizes inventory and increases efficiency. JIT production
    systems cut inventory costs because manufacturers receive materials and parts as they are needed for
    production and so do not have to pay storage costs. Manufacturers are also not left with unwanted
    inventory if an order is canceled or not fulfilled.

    1
    https://www.investopedia.com/terms/i/inventory-management.asp

    MODULE 4: Working Capital Management


    One example of a JIT inventory system is a car manufacturer that operates with low inventory levels but
    heavily relies on its supply chain to deliver the parts it requires to build cars, on an as-needed basis.
    Consequently, the manufacturer orders the parts required to assemble the cars only after an order is
    received.

    Example of Just-in-Time
    Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when it receives new car
    orders. Although the company installed this method in the 1970s,2 it took 20 years to perfect it.

    Sadly, Toyota's JIT inventory system nearly caused the company to come to a screeching halt in
    February 1997, after a fire at Japanese-owned automotive parts supplier Aisin decimated its capacity to
    produce P-valves for Toyota's vehicles. Because Aisin is the sole supplier of this part, its weeks-long
    shutdown caused Toyota to halt production for several days. This caused a ripple effect, where other
    Toyota parts suppliers likewise had to temporarily shut down because the automaker had no need for
    their parts during that time period. Consequently, this fire cost Toyota 160 billion yen in revenue.

    ECONOMIC ORDER QUANTITY


    Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize
    inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model
    was developed in 1913 by Ford W. Harris and has been refined over time.

    The formula assumes that demand, ordering, and holding costs all remain constant.

    Ordering Cost2
    The number of orders that occur annually can be found by dividing the annual demand by the volume per
    order. The formula can be expressed as:

    For each order with a fixed cost that is independent of the number of units, S, the annual ordering cost is
    found by multiplying the number of orders by this fixed cost. It is expressed as:

    2
    https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-eoq-formula/

    MODULE 4: Working Capital Management


    Holding Cost
    Holding inventory often comes with its own costs. This cost can be in the form of direct costs incurred by
    financing the storage of said inventory or the opportunity cost of holding inventory instead of investing the
    money elsewhere. As such, the holding cost per unit is often expressed as the cost per unit multiplied by
    the interest rate, expressed as follows:

    SESSION SUMMARY
    This module discussed the inventory management. In this module, the methods used to manage
    inventory were discussed, such as the Just in Time Management and Economic Order Quantity.

    SELF-ASSESSMENT

    REFERENCES
    Refer to the references listed in the syllabus of the subject.

    MODULE 4: Working Capital Management

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