assignment zandro

8/3/2019 Assignment Zandro

http://slidepdf.com/reader/full/assignment-zandro 1/25

SOUTHERN PHILIPPINES AGRI-BUSINESS & MARINE & AQUATIC SCHOOL OF TECHNOLOGY

(SPASMAST)-COLLEGE OF AGRICULTURAL SCIENCES (CAS), MATTI, DIGOS CITY

ASSIGNMENT ON FORECASTING & INVENTORY

Submitted by:

OLIVER M. PRIETO1ST Year MABM

Submitted to:

ZANDRO P. IBAÑEZ, MBA



MODULE 3

BUSINESS FORECASTING

Definition of Forecasting

A planning tool that helps management to cope uncertainty of the future, basically rely on data

from the past & present.

The use of historic data to determined the direction of future trends. Use by companies to

determined how to allocate their budgets for an upcoming period of time.

Importance of Forecasting

Forecasting is an integral part of business management and a self-assessment tool for the

company/business. Without a solid idea of what future sales are going to be we cant manage inventory

or cash flow or plan for growth. The purpose of forecasting is to provide information that can use to

make intelligent business decisions and provides an important benchmark for firms which have a long

term perspective of operations. A sales forecast reports, graphs and analyzes the pulse of the business.

It can make the difference between just surviving and highly successful in business. It is a vital

cornerstone of a business/companys budget thus, the future direction of a certain business/companymay rely/rest on the accuracy of forecasting.

Forecasting processes realize important benefits such as:

. Enhance cash flow

. Knowing when and how much to buy/purchase

. In-depth knowledge of customers and the products they order

. The ability to plan for production and capacity

. The ability to identify the pattern or trend of sales

. Determine the value of a business above the value of its current assets

. Ability to determine the expected return on investment

The combination of these benefits may result in:

. Increased in revenue/Maximizing profit

. Increased customer retention/Maximizing customer service

. Decreased cost/Minimizing inventory investment

. Increased efficiency/Maximizing efficiency of purchasing and production



Different Forecasting Techniques

1. Forecasting by Extension of Past History

This method of forecasting technique uses data from the past as a beginning point and as the

basis for future patterns it is also known as Time Series Method.

2. Forecasting by the Use of Exponential Smoothing

This method uses a single weighing factor called alpha (a). Alpha stands for the probability that

the same actual sale will take place.

3. Forecasting by Trend Projection

This is a mathematical method which first trend line to a set of past observations projecting theline into the future.

4. Judgmental Forecasting

This method uses individual or experts to ask for their opinion and personal judgment, in which

case primarily rely on human judgment to interpret available data and make projection in the future.



FORECASTING TECHNIQUES

COMPARISON AND CONTRAST

Forecasting by Extension of Past History

> this method uses the 3 types of average forecast the Unweighted Average Forecast, which is use

previous data to find the average of the said data. Weighted Average Forecast, this type of forecast

giving weight to most recent data. Moving Average Forecast, averages that are updated as new data.

> this method make forecast based purely on historical patterns in the data.

> most quantitative forecasting methods try to explain patterns in historical data as a means of using

those patterns to forecast future patterns.

> dont tend to work well when theres either a trend in the data or seasonal effects.

> simple, cheap to run and relatively easy to interpret.

> can be quite accurate particularly over the short term.

Forecasting by the Use of Exponential Smoothing

> more importance is place on the most recent data than on historical data.

> if there is a trend in the data itll use the recent observation to make up the bulk of the forecast and

the forecast is more likely to reflect the trend.

Forecasting by Trend Projection

> gathering first of the past data, before any forecast could be undertaken.

> this method uses trend equation formula Y=a+bx

Judgmental Forecasting

> this method of forecasting uses experts or group of expert e.g. Delphi Technique asking for their

opinions, predictions, judgment and projections base on the data they interpret.



EXERCISES/PROBLEM SOLVING

1. Suppose that the Perpetual Help College of Rizal had the following record of its growth of enrollment

from1997-2004

Year Enrollment Year Enrollment

1997 1,200 2001 3,000

1998 1,500 2002 5,800

1999 2,000 2003 6,000

2000 2,500 2004 7,000

a. Forecast the 2005 enrollment using 5 year weighted average forecast.

WAF= 2500+3000(2)+5800(3)+6000(4)+7000(5)1+2+3+4+5

= 2500+6000+17400+24000+35000

15

= 84900

15

= 5660 is a weighted average forecast for 2005

b. Forecast the 2005enrollment using the Trend Projection

Year Enrollment (y) Time (x)

1997 1,200 0

1998 1,500 1

1999 2,000 2

2000 2,500 3

2001 3,000 4

2002 5,800 5

2003 6,000 6

2004 7,000 7

b=xy-nxyx-nx

a=y-b x



xy=1200(0)+1500(1)+2000(2)+2500(3)+3000(4)+5800(5)+6000(6)+7000(7)

xy= 139,000

x= 3.5, y= 3625,n= 8

x= 0+1+2+3+4+5+6+7

x= 140

b= 139,000-8(3.5)3625140-8(3.5)

b= 892.66

a= 3625-892.86(3.5)

a= 500

Trend Equation y=bx+a

y= 892.86x+500

x=8

y= 892.86(8)+500

y= 7643 2005 enrollment

c. Forecast the 2005 enrollment using exponential smoothing forecast if alpha was .6 andprevious forecast for 2004 was 5500.

a= .6 @ year 2004 enrollment was 5500

y= 1200+1500+2000+2500+3000+5800+6000+55008

y= 3437.5

x= 3.5

a= y-bx

.6= 3437.5-b 3.5

b= 981.97

x= 8

y= 981.97(8)+500



y= 7643 2005 enrollmentd. Use 2-year weighed moving average forecast from 1999 to 2005.

Year Enrollment 2-year weighed Average Moving Forecast

1997 1,200

1998 1,500

1999 2,000 (1200+1500x2)÷3=1400

2000 2,500 (1500+2000x2)÷3=1833.33

2001 3,000 (2000+2500x2)÷3=2333.33

2002 5,800 (2500+3000x2)÷3=2833.33

2003 6,000 (3000+5800x2)÷3=4866.67

2004 7,000 (5800+6000x2)÷3=5933.33

2005 (6000+7000x2)÷3=6666.67

2. Suppose that the value of one dollar compared to the peso grew as follows:

Year Value of $ 1 in Peso Year Value of $ 1 in Peso

1998 P 7.50 2002 P 18.00

1999 7.50 2003 25.50

2000 8.00 2004 20.00

2001 14.00

a. Forecast the value of one dollar in 2005 using a 3year weighted average.

WA= 18+25.50 (2)+20(3) = 18+51+60 =21.5 the value of dollar in the year 2005 1+2+3 6

b. Show moving 2-year weighed moving average forecast from 2000 to 2005.

Year Value 2-year weighed Average Moving Forecast

1998 P 7.50

1999 7.50

2000 8.00 (7.50+7.50x2)÷3=10

2001 14.00 (7.50+8.00x2)÷3=10.33

2002 18.00 (8.00+14.00x2)÷3=14.662003 25.50 (14.00+18.00x2)÷3=21.33

2004 20.00 (18.00+25.50x2)÷3=29

(25.50+20.00x2)÷3=30.33



c. Using exponential smoothing with a= .4 and suppose that previous forecast in 1997 was 8.50indicate the moving forecast until 2005, if actual value in 1997 was 6.

d. Use the Trend Projection method to forecast the value of the dollar in 2006.

Year Value Time (x)

1998 P 7.50 0

1999 7.50 1

2000 8.00 2

2001 14.00 3

2002 18.00 4

2003 25.50 5

2004 20.00 6

b=xy-nxyx-nx

a=y-b x

xy=7.50(0)+7.50(1)+8.00(2)+14.00(3)+18.00(4)+25.50(5)+20.00(6)

xy= 392.5

x= 3, y= 14.35,n= 7

x= 0+1+2+3+4+5+6

x= 91

b= 392.5-7(3)14.35 91-7(3)

b= 3.25

a= 14.35-3.25(3)

a= 4.6

Trend Equation y=bx+a

y= 3.25 (7)+4.6

y= 27.35 is the value forecast of $ 1 dollar for the year 2006.



3. Aling Elong had the following sales in her small sari-sari store for the past 5 weeks: P 2,500,P3,000, P 2,000, P 3,400 and P 2,800. Forecast her sales for the sixth week using 5 weeksweighted average.

F= 2500+3000(2)+2000(3)+3400(4)+2800(5)

1+2+3+4+5

F= 42100

15

F= 2806.66 is the sale forecast for the sixth week.

REFERENCES

SUSAN WARD (Guide on Sales Forecasting)INVESTOPEDIA (Forecasting)THE MARLLORYS (Business Forecasting, Published Feb. 4, 2011)NEIL MASON (Forecasting Techniques, Published July 25, 2006)



MODULE 4

INVENTORY

Definition of Inventory

A complete list of items such as property, goods in stock or the contents of a building.

A detailed, itemized list, report, or record of things in ones possession, especially a periodic

survey of all goods and materials in stock.

A current assets, a stock or store of goods.

What to Inventory?

(A) Raw materials and purchased parts

(B) Partially completed goods

(C) Finished-goods inventories or merchandise

(D) Replacement parts, tools, and suppliers

(E) Goods-in-transit to warehouses or Goods In progress

Functions of Inventory

1. To meet anticipated customer demand . These inventories are referred to as anticipation stocks

because they are held to satisfy planned or expected demand.

2. To smooth production requirements. Firms that experience seasonal patterns in demand often

build up inventories during off-season to meet overly high requirements during certain seasonal

periods. Companies that process fresh fruits and vegetable deal with seasonal inventories

3. To decouple operations. The buffers permit other operations to continue temporarily while the

problem is resolved. Firms have used buffers of raw materials to insulate production from

disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations

from manufacturing disruptions.

4. To protect against stock-outs. Delayed deliveries and unexpected increases in demand increase

the risk of shortages. The risk of shortages can be reduced by holding safety stocks, which are

stocks in excess of anticipated demand.5. To take advantage of order cycles. Inventory storage enables a firm to buy and produce in

economic lot sizes without having to try to match purchases or production with demand

requirements in short run.

6. To hedge against price increase. The ability to store extra goods also allows a firm to take

advantage of price discounts for large orders.

7. To permit operations. Production operations take a certain amount of time means that there

will generally be some work-in-process inventory.



Requirements for Effective Inventory Management

To be effective, management must have the following:

1. A system to keep track of the inventory on the hand on order.

2. A reliable forecast of demand that includes an indication of possible forecast error.3. Knowledge of lead times and lead time variability.

4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.

5. A classification system for inventory items.

Inventory Counting Systems

1) Periodic System

This is a physical count of items in inventory is made at periodic intervals (e.g. weekly, monthly) inorder to decide how much to order of each item. Major users: Supermarkets, discounts stores, and

department stores.

Advantage

Orders for many items occur at the same time, which can result in economies in processing and

shipping orders

Disadvantages

a) Lack of control between reviews.

b) The need to protect against shortages between review periods by carrying extra stock.

c) The need to make a decision on order quantities at each review

2) Perpetual Inventory System (also known as a continual system)

This keeps track of removals from inventory on a continuous basis, so the system can provide

information on the current level of inventory for each item.

Advantages

1. The control provided by the continuous monitoring of inventory withdrawals.

2. The fixed-order quantity; management can identify an economic order size.

Disadvantage

1. The added cost of record keeping.



Two-bin-system method

Is two containers of inventory; reorder when the first is empty. The advantage of this system is that

there is no need to record each withdrawal from inventory; the disadvantage is that the reorder

card may not be turned in for a variety of reasons.

Tracking System

Universal Product Code (UPC) bar code printed on a label that has information about the item to

which it is attached. Bar coding represents an important development for other sectors of business

besides retailing. In manufacturing, bar codes attached to parts, subassemblies, and finished goods

greatly facilitate counting and monitoring activities.

Inventory Cost (Three Basic Costs)

1. Holding or Carrying Cost is the costs to carry an item in inventory for a length of timeusually a year. Cost includes interest, insurance, taxes, depreciation, obsolescence,

deterioration, spoilage, pilferage, breakage, etc.

2. Ordering Cost is cost of ordering and receiving inventory. These include determining how

much is needed, preparing invoices, inspecting goods upon arrival for quality and quantity,

and moving the goods to temporary storage.

3. Storage Cost is cost resulting when demand exceeds the supply of inventory on hand. These

costs can include the opportunity cost of not making a sale, loss of customer goodwill, latecharges, and similar costs

ECONOMIC ORDER QUANTITY MODELS

Economic Order Quantity (EOQ) is the order size that minimizes total cost. EOQ models identify the

optimal order quantity in terms of minimizing the sum of certain annual costs that vary with order

size.

Three (3) Order Size

1. The economic order quantity model.

2. The economic order quantity model with non instantaneous delivery.

3. The quantity discount model.



Inventory Cycles begins with the receipt of an order of Q units, which are withdrawn at instant rate

over time. When the quantity on the hand is just sufficient to satisfy demand during lead time, an

order for Q units is submitted to the supplier.

Developing EOQ Mathematical Model

Assumption of the Basic EOQ Model

1. Only one product is involved.

2. Annual demand requirements are known.

3. Demand is spread evenly throughout the year so that the demand rate is reasonably

constant.

4. Lead time does not vary.5. Each order is received in a single delivery.

6. There are quantity discounts.

Order QuantityOrder Quantity

Annual CostAnnual Cost

Holding CostHolding Cost

EOQ ModelH olding Cost( H) or carrying cost relate

to having items in storage. Cost

includes interest, insurance, tax,

depreciation Obsolesce, deterioration,

spoilage, breakage. Warehouse cost (heat, light, security and rent.

In EOQ Model Holding Cost is Express






Order (Setup) CostOrder (Setup) Cost

EOQ Model




Total Cost CurveTotal Cost Curve

Order (Setup) CostOrder (Setup) Cost

OptimalOptimal

Order Quantity (Q*)Order Quantity (Q*)

EOQ Model

Optimal Quantity =

Annual Holding Cost = H Q

.2

Annual Carrying Cost = S Q

D.

Total annual Inventory Cost= H Q

.2

+ S Q

D.

Length Of order Cycle = .

D

Q

Ordering Costs are the costs of

ordering and receiving inventory.

They are the cost that varies with the

actual placement of an order such as

shipping cost, preparing invoices,inspecting goods upon arrivals.

The ordering Cost express as Fixed

By merging the two Graphs we can

notice that the minimum Inventory

Cost is at the intersection point.

Total Cost =

Holding Cost + Ordering Cost

H

S D EOQvv

!2



EXAMPLE OF ORDERING COST FACTORS

y Processing and inspecting incoming inventory

y Developing and sending purchase ordersy Bill paying

y Inventory inquiries

y Utilities, phone bills, and so on, for the purchasing department

y Salaries and wages for the purchasing department employees

y Supplies such as forms and paper for the purchasing department

EXAMPLES OF CARRYING COST FACTORS

y Cost of capital

y Taxes

y Insurance

y Spoilage

y Theft

y Obsolescence

y Supplies such as forms and paper for the warehouse

y Utilities and building costs for the warehouse

y Salaries and wages for warehouse employees

Determinants of Reorder point quantity(when we have to reorder?)

a) Rate of demandb) The lead timec) The extent of demandd) The degree of stock out risk acceptable to management

ROP (Reorder Point) = Daily Demand X Lead Time

ROP = d x L



Example

SaveMart needs 1000 coffee makers per year. The cost of each coffee maker is $78. Ordering cost is

$100 per order. Carrying cost is $20 of per unit cost. Lead time is 5 days. SaveMart is open 360 days/yr.

(A) What is EOQ Model?

(B) How many times per year does the store reorder?

(C) What is the length of order cycle?

(D) What is the total annual cost if the EOQ quantity is ordered?

Answer

(A) H Q

H

S D EOQ .

210

100100022!

vv

!

vv

! = 100 units

(B) Number of orders = .

Q

D= .

100

1000= 10 times

(C) Cycle Length = . D

Q= .1000

100= 0.1 per year = 0.1 x 360 days/year = 36 days

(D) Total Annual Inventory Cost = H Q

.2

+ S Q

D. = 100

100

100020.

2

100 x x =2000

EOQ with Non instantaneous Replenishment (EPQ)



When a firm is both a producer and a user or deliveries are spread over time, inventories tend to build

up gradually instead of instantaneously. If usage production (or delivery) rates are equal, there will be

no inventory buildup since all output will be used immediately and the issue of lot size doesnt come up.

In the more typical case, the production or delivery rate exceeds the usage rate. In the production case,

production occurs over only a portion of each cycle because the production rate is greater than the

usage rate, and usage occurs over the entire cycle.

The economic Production Quantity =u p

p

H

DS

.2

Total Inventory cost = Carrying cost + setup cost

S Q

D H

I TC ..

2max

min !

Cycle Time =u

Q p

time between beginning of range

Run time = p

Q pproduction phase of the cycle

Average inventory2max I

I average !

The maximum inventory level = ).( u p p

Q p

Where

P is Production or Delivery Rate

U is usage rate



Example

A toy manufacturer uses 48,000 rubber wheels per year for its popular dump truck. The firm makes its

own wheels, which it can produce at a rate of 800 per day. The toy trucks are assembled uniformly over

entire year. Carrying cost is $ 1 per wheel a year. Setup cost of production run of wheels is $45. The firm

operates 240 days per year. Determine the:-

a) Optimal Run Size.

b) Minimum total annual cost for carrying and setup.

c) Cycle time for the optimum run size.

d) Run time.

Answer

D = 48,000 wheels per year

S= $ 45

H= $ 1 per wheel per year

P = 800 wheels per day

U = 48,000 wheel per 240 days or 200 wheels per day

a) Q p =u p

p

H

DS

.2

=200800

800.

1

45)48000(2

=2400 wheels

b) S Q

D H

I TC ..

2max

min ! so we first must find Imax

The maximum inventory level = ).( u p p

Q p = wheel 1800)200800.(

800

2400!

So S Q

D H

I TC ..

2max

min ! = 1800)45(200

4800)1(

2

1800!

c) Cycle Time = d aysu

Q p12

200

2400!!



d) Run time = d ays p

Q p3

800

2400!!

EOQ with Quantity Discount

Quantity Discounts are price reductions for large orders offered to customers to induce them to buy in

large quantities. If quantity discounts are offered, the customer must weigh the potential benefits of

reduced purchase price and fewer orders that will result from buying in large quantities against the

increase in carrying costs caused by higher average inventories

TC = carrying cost + Ordering cost + Purchasing Cost

TC = ...2

P DS Q

D H

Q Where: P = Unit price

EXAMPLE

The maintenance department of a large hospital uses about 180 cases of liquid cleanser annually.

Ordering costs are $25, carrying costs are $5 per case a year, and the new schedule indicates that orders

of less than 45 cases will cost $2.0 per case, 45 to 69 will cost $1.7 per case, and more than 70 cases will

cost $1.4 per case. Determine the optimal order quantity and total cost.

unit H

S D EOQ 43

5

2518022!

vv

!

vv

!

Total Cost = H Q

.2

+ S Q

D. = 15.29843225

43

1805.

2

43! x x x

If we order 45 unit we may get discount the price will be reduced from $2 to $1.7 and the total

annual cost will be:-

Total Annual Cost = H Q

.2

+ S Q

D. = 5.5181807.125

45

1805.

2

45! x x x

If we order 70 unit we may get further reduction as the price will be reduced from $1.7 to $1.4

the annual cost in this case would be :-



Total Annual Cost = H Q

.2

+ S Q

D. = 3.4911804.125

70

1805.

2

70! x x x

We can note that at some range from 45 to 70 units annual cost will be appropriate even the EOQ state

other range due to discount effect.

Definition of Inventory Management

Provides information to efficiently manage the flow of materials effectively utilize people and

equipment coordinate internal activities and communicate with customers. Inventory managementdoes not make decisions or manage operations, they provide the information to managers who make

more accurate and timely decisions to manage their operations.

Inventory Management, must be tie together the following objectives to ensure that there is continuity

between functions:

> Companys Strategic Goals

> Sales Forecasting

> Sales and Operations Planning

> Production and Materials Requirements Planning

> Inventory Reduction

Objectives of Inventory Management

To make sure the firms cash flow are managed efficiently. Efficient management of inventory

should ultimately result in the maximization of the profit. Inventory should be turned over as quickly as

possible, avoiding stock-outs it might result in closing down the production line or lead to a loss of sale.



It implies that which the management should try to pursue the financial objective of turning inventory

as quick as possible, it should at the same time ensure sufficient inventories to satisfy production and

sales demands. In other words the manager has to reconcile these two conflicting requirements. Stated

differently, the objective, the objective of inventory management consists of two counter balancing

involves cost, such that the smaller the inventory, the lower the cost to the firm. But inventories also

provide benefits to the extent that it facilitates the smooth functioning of the firm. The larger the

inventory, the better it is from this view point. Obviously the manager should aim at a level of

inventory, which will reconcile these conflicting elements. That is to say, an optimum level of inventory

should be determined on the basis of the trade-off between cost and benefits associated with the level

of inventory. We can say that the profit and loss of a company largely depends on its inventory

management system. If the company properly controls its inventory management system, it will be

profitable.Otherwise it will be cause of being loss.

The objectives of Inventory management summarize as follows:

1. Maximizing Customer Services=Increased in Customer Retention

2. Maximizing Efficiency of Purchasing and Production=Increased in Efficiency

3. Minimizing Inventory Investment=Decreased in Cost

4. Maximizing Profit=Increased in Revenue

Common Inventory Management Problems

1. Unqualified employees in charge of inventory. Too many companies put people in charge of

their inventory distribution who either dont have enough experience, are neglectful in their job,

or dont have adequate training. No matter what kind of system is used, companies need to pay

closer attention in overseeing their inventory management and making sure employees receive

proper training.

2. Using a measure of performance for their business that is too narrow. All too often companies

will evaluate how well their business is doing. The processes they use are not wide enough and

do not encompass all the aspects and factors in the company. Many areas get overlooked and

can lead to either inventory shortages or inventory stockpiling.

3. A flawed or unrealistic business plan for a business for the future. To predict how well a

company may do in the future, you have to collect enough data and accurately analyze it. The

downfall of many companies starting out is that they give an unrealistic assessment of a

companys growth. This affects inventory management because if a company predicts more

growth than they actually experience, it can lead to an overstock of inventory. The opposite is

true if forecasters do not predict enough growth and are left with not enough inventory.



4. Not identifying shortages ahead of time. It happens all the time. A business needs a number of

products or materials but discover that they do not have enough in stock and must re-order.

Waiting for the shipment to come in can slow down the supply chain process. Not having

enough product in stock to meet customer demand can lead to bad customer relations. A

supervisor in charge of inventory management should look over their inventory on a regular

basis to make sure enough product is in stock.

5. Bottlenecks and weak points can interfere with on-time product delivery. This means that if

too many orders come in for outgoing shipments and do not get handled in an efficient manner,

they can build up, or bottleneck. This slows down deliveries. The same is true for any weak

points in an inventory management system. Weak points slow down the system and can stop it

altogether.

6. Falling victim to the bullwhip effect. This is an over-reaction by a company to changes in the

market. As the demand of a market changes, a company may panic and order an overstock of

inventory, thinking the new market conditions will move the inventory. Instead, the market

stabilizes and the business is now left with a surplus of products that just sit in the warehouse,taking up space and not making money.

7. Too much distressed stock in inventory. Distressed stock is products or materials in inventory

that has or will soon pass the point where it can be sold at the normal price before it expires.

This happens all the time in grocery stores. As a particular food product nears its expiration

date, the business will discount the item in order to move it quickly before it expires.

8. Excessive inventory in stock and unable to move it quickly enough. This is probably the most

common problem for most businesses. Cash-flow comes from moving inventory. If a company

buys an amount of product for their inventory and they do not move it, the company ends up

losing money.

9. Computer assessment of inventory items for sale is inaccurate. Nothing is more frustrating

than going to a business that says it has a product but it turns out that they do not. The

quantities are off and the actual items are not available. Too many people assume that the

computer records are infallible. But the records have to be entered by a person and if the

person responsible does not keep accurate records, it can turn into a real headache. Inaccurate

inventory records can easily result in loss of money and strained customer service.

10. Computer inventory systems are too complicated. There are many inventory software

programs available for business use. The problem is that many of these programs are not user-

friendly. Computer software developers do not take into account that most of the people who

will actually be using these systems are not tech savvy. A company does not always have the

time and money to invest in training of personnel to use software effectively.

11. Items in-stock get misplaced. Even if the computer accurately shows the item as in stock, it may

have been misplaced somewhere at the warehouse, or in the wrong location within a store. This

can lead to a decrease in profits due to lost sales and higher inventory costs because the item

must be re-ordered. Plus, the company must spend the time for employees to track down the

misplaced item.



12. Not keeping up with the rising price of raw materials. This falls more into the accounting end of

inventory management. By not keeping current with the rising price of raw materials, a

company will lose profits because they are not adjusting the price of their finished products.

Finished items in inventory must be relative to the cost of raw goods.

How to Avoid Inventory Problems

Plan sales. In order to effectively manage your inventory, you need to know what you expect to sell.

For larger retailers that are stocking many SKU's, sophisticated sales forecasting software may make

sense. For many small retailers, however, developing a simple spreadsheet from your POS sales

history, by month by key category, is most cost effective. Start with last years sales histories, and

make adjustments for unusual events, such as weather, out of stocks, one-time promotions, etc. Then

factor in the appropriate sales increase or decrease percentage, based on a reading of the sales

potential for the category for the upcoming season. Finally, for larger categories, it may make sense

to break the sales plan down by sub-categories, styles or vendors.

Plan inventories. It makes little sense to bring in more inventory at any given time than you need to

set your displays, support your planned sales until the next delivery, and provide a safety stock in the

event of an unexpected sales spike or a late vendor delivery. Buying inventory too far in advance is

one of the surest ways to find yourself over-stocked down the road. For many small retailers, the best

way to plan inventories is to plan to have enough on hand at month end to support the next two or

three months sales.

Plan inventory receipts. If you've planned sales by month, and ending inventories by month, it's easy

to calculate how much inventory to bring in each month. You need to bring in enough to cover that

month's sales plan and ending inventory, less the prior months ending inventory. In this way, a buyer

can know in March, when preparing for the fall season, for example, how much inventory to plan on

bringing in each month of the season.

Plan markdowns. Planning markdowns goes hand in hand with planning inventories. If you plan the

date of the first seasonal markdown before the season even begins, you can plan the inventory you

want to have on hand at that point in time, and thus your markdown percentage, as well as your

markdown sales before your second markdown, as well as all subsequent markdowns.

Plan dynamically.Once you've completed your preseason planning, don't put it in a drawer never to

be seen again. Use that plan as a dynamic tool to track the progress of the season. As each week goes

by, and sales trends begin to develop, adjust future sales plans accordingly, and adjust inventory

plans for those updated sales plans. If sales are exceeding plan, you want to be sure you have the



inventory to keep the momentum going. Conversely, if sales are coming up short of plan, the sooner

you adjust your inventory plans, and thus your scheduled receipts, the less likely you are to end up

with excess inventory that needs to be marked down at season's end.

The root cause of many inventory problems faced by small retailers is the lack of adequate preseasonsales and inventory planning. It may seem that there's never enough time for such planning, as if it's a

luxury that just can' t be afforded, but in reality, it's a critical necessity, a vital investment in the future

health of any small retailer.

Benefits of Inventory

Facts

Business owners usually create internal policies and procedures for inventory planning and control.

Managers and employees must follow these policies and procedures when handling the companys

inventory. Policies and procedures outline who can order inventory, how inventory flows through the

company, accounting policies for valuing inventory and procedures to deal with obsolete goods.

Inventory planning and control has several benefits for companies who derive the majority of their

revenue sales from inventory.

Better Cash Flow

Inventory planning and control can help companies manage cash flow. Small businesses do not have

large capital balances for purchasing copious amounts of inventory. Business owners implement policies

and procedures to limit the amount of money spent on inventory. Cash flow improvements also come

from purchasing the lowest cost inventory available in the business environment. Not only does low-

cost inventory save the company money, but it also allows companies to develop a cost advantage in the

economic market.

Higher Profits

Business owners can use inventory planning and control to generate higher profits. Purchasing the right

type of inventory to meet consumer demand often leads to higher business profits. Companies who sell

through their entire inventory multiple times each year also increases business profits. Inventory

planning and control procedures can also limit the amount of obsolete inventory in the company.

Obsolete inventory must be disposed of and written off by the company. Writing off obsolete inventory

creates a loss on the income statement.

Limits Abuse

Inventory policies and procedures prevent employee abuse of inventory. Loose work environments can

allow employees to steal inventory items for personal use. Stolen inventory results in a financial loss for

the company. Employees can also use a companys inventory items in the workplace for personal

reasons. Previously used inventory may be unsellable depending on the companys operating industry.

Proper employee behavior is a significant factor relating to inventory cash flow and profitability.



Considerations

Business owners should consider implementing business technology to help manage inventory. Business

and accounting software provides business owners with electronic methods to order, receive, manage

and sell inventory. Technology usually helps business owners spend less time on inventory planning andcontrol functions. Spending less time on these back office functions allows business owners to remain at

the forefront of business sales in increasing their companys profitability.

REFERENCES

Indian Institute of Materials Management In pursuit of excellence in supply managementSuper Admin Published 24 August 2008International University (Management Science 2 ABI-301Ted Hurlbut 2004 (Productivity on Inventory Management)Doug Brilee (Inventory Management)

assignment zandro

Documents