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Materials management
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Materials managementis the branch of logistics that deals with the tangible componentsof asupply chain. Specifically, this covers the acquisition of spare parts andreplacements, quality controlof purchasing and ordering such parts, and the standardsinvolved in ordering, shipping, and warehousing the said parts.
Contents
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" #reas of $oncentrationo "." %uality #ssurance
o ".& Standards
o ".' (aterials (anagement Week
& )eferences
' *+ternal links
[edit] Areas of Concentration
[edit] Quality Assurance
# large component of materials management is ensuring that parts and materials used inthe supply chain meet minimum requirements by performing quality assurance%#-.While most of the writing and discussion about materials management is on acquisitionand standards, much of the day to day work conducted in materials management dealswith %# issues. arts and material are tested, both before purchase orders are placed andduring use, to ensure there are no short or long term issues that would disrupt the supplychain. "!/his aspect of material management is most important heavily automatedindustries, since failure rates due to faulty parts can slow or even stop production lines,throwing off timetables for production goals.
[edit] Standards
/he other ma0or component of materials management is standards compliance. /here arestandards that are followed in supply chain management that are critical to a supplychain1s function. For e+ample, a supply chain that uses0ust2in2timeor lean replenishmentrequires absolute perfection in the shipping of parts and material from purchasing agentto warehouse to place of destination. Systems reliant on vendor2managed inventories
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must have up2to2date computeri3ed inventories and robust ordering systems for outlyingvendors to place orders on. (aterials management typically insures that the warehousingand shipping of such components as are needed follows the standards required to avoidproblems. /his component of materials management is the fastest changing part, due torecent innovations in S$(and in logistics in general, including outsourced management
of warehousing, mobile computing, and real2time logistical inventories.
[edit] Materials Management Week
*ach year, an entire week is dedicated to celebrating resource and materials managementprofessionals for their outstanding contributions to healthcare and the overall success ofthe supply chain. Sponsored by the #ssociation for 4ealthcare )esource 5 (aterials(anagement #4)((-, 6ational 4ealthcare )esource 5 (aterials (anagement Week(( Week- provides an opportunity to recogni3e the integral role materials managementprofessionals play in delivering high2qualitypatient carethroughout the health careindustry. 7n &889 (aterial (anagement Week isctober ;2"8
Supply chain
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#n illustration of a company1s supply chain< the arrows stand for supplier2relationshipmanagement, internal S$( and customer2relationship management cf. $hen=aulra0,
&88;-
# 1supply chainis the system of organi3ations, people, technology, activities, informationand resources involved in moving a product or service from supplierto customer. Supplychain activities transform natural resources,raw materialsand components into a finishedproduct that is delivered to the end customer. 7n sophisticated supply chain systems, usedproducts may re2enter the supply chain at any point where residual value is recyclable.Supply chains linkvalue chains"! .
# typical supply chain begins with ecological and biological regulation of naturalresources, followed by the human e+traction of raw material, and includes several
production links e.g., component construction, assembly, and merging- before movingon to several layers of storage facilities of ever2decreasing si3e and ever more remotegeographical locations, and finally reaching the consumer.
(any of the e+changes encountered in the supply chain will therefore be betweendifferent companies that will seek to ma+imi3e their revenue within their sphere ofinterest, but may have little or no knowledge or interest in the remaining players in thesupply chain. (ore recently, the loosely coupled, self2organi3ing network of businesses
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that cooperates to provide product and service offerings has been called the ExtendedEnterprise.&!
Contents
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" Supply chain modeling
& Supply chain management
' See also
; *+ternal links
> )eferences
[edit] Supply chain modeling
# diagram of a supply chain. /he black arrow represents the flow of materials andinformation and the gray arrow represents the flow of information and backhauls. /heelements are a- the initial supplier, b- a supplier, c- a manufacturer, d- a customer, e-the final customer.
/here are a variety of supply chain models, which address both the upstream anddownstream sides.
/he S$) Supply $hain perations )eference- model, developed by the Supply $hain$ouncil, measures total supply chain performance. 7t is a process reference model forsupply2chain management, spanning from the supplier1s supplier to the customer1scustomer.'!. 7t includes delivery and order fulfillment performance, production fle+ibility,warranty and returns processing costs, inventory and asset turns, and other factors inevaluating the overall effective performance of a supply chain.
/he ?lobal Supply $hain Forum?S$F- introduced another Supply $hain (odel. /hisframework ;!is built on eight key business processes that are both cross2functional andcross2firm in nature. *ach process is managed by a cross2functional team, includingrepresentatives from logistics, production, purchasing, finance, marketing and research
and development. While each process will interface with key customers and suppliers, thecustomer relationship management and supplier relationship management processes formthe critical linkages in the supply chain
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Supply chain management
# ?ermanpaper factoryreceives its daily supply of @> tons of recyclable paperas its rawmaterial
7n the "9A8s the term Supply $hain (anagementS$(- was developed>!, to e+press theneed to integrate the key business processes, from end user through original suppliers.riginal suppliers being those that provide products, services and information that addvalue for customers and other stakeholders. /he basic idea behind the S$( is thatcompanies and corporations involve themselves in a supply chain by e+changinginformation regarding market fluctuations and production capabilities.
7f all relevant information is accessible to any relevant company, every company in thesupply chain has the possibility to and can seek to help optimi3ing the entire supply chainrather than sub optimi3e based on a local interest. /his will lead to better planned overallproduction and distribution which can cut costs and give a more attractive final productleading to better sales and better overall results for the companies involved.
7ncorporating S$( successfully leads to a new kind of competition on the global marketwhere competition is no longer of the company versus company form but rather takes ona supply chain versus supply chain form.
(any electronics manufacturers of?uangdongrely on supply of parts from numerouscomponent shops in ?uang3hou
/he primary ob0ective of supply chain managementis to fulfill customer demandsthrough the most efficient use of resources, including distribution capacity, inventoryandlabor. 7n theory, a supply chain seeks to match demand with supply and do so with theminimal inventory. Barious aspects of optimi3ing the supply chain include liaising with
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suppliers to eliminate bottlenecks< sourcing strategically to strike a balance betweenlowest material cost and transportation, implementing J7/ Just 7n /ime- techniques tooptimi3e manufacturing flow< maintaining the right mi+ and location of factories andwarehouses to serve customer markets, and using location=allocation, vehicle routinganalysis, dynamic programmingand, of course, traditional logisticsoptimi3ation to
ma+imi3e the efficiency of the distribution side.
/here is often confusion over the terms supply chain and logistics. 7t is now generallyaccepted that the term Cogistics applies to activities within one company=organi3ationinvolving distribution of product whereas the term Supply chain also encompassesmanufacturing and procurement and therefore has a much broader focus as it involvesmultiple enterprises, including suppliers, manufacturers and retailers, working together tomeet a customer need for a product or service.citation needed!
Starting in the "998s several companies choose to outsource the logistics aspect of supplychain management by partnering with a 'C, /hird2party logistics provider.$ompanies
also outsource production to contract manufacturers.
citation needed!
/here are actually four common Supply $hain (odels. Desides the two mentionedabove, there are the #merican roductivity 5 %uality $enter1s #%$- rocess$lassification Framework and the Supply $hain Dest ractices Framework.
[edit] See also
#merican roduction and 7nventory $ontrol Society
$old chain
$2B#)W7
Eemand chain Eemand chain management
Eemand optimi3ation
Eistribution
Eistribution resource planning
Factory hysics
*+tended *nterprise
7ndustrial engineering
7nventory control
Ciquid logistics
Cogistics
(ilitary supply chain management
)everse logistics
Supply network
Supply chain management
Supply chain network
Supply chain optimi3ation
Supply chain security
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Balue chain
Inventory
From Wikipedia, the free encyclopedia
Jump to: navigation,searchThis article is about business inventory. For other uses, seeInventory (disambiguation).
"Overstoc" redirects here. For the online retailer, seeOverstoc.com.
Inventoryis a list for goodsand materials, or those goods and materials themselves, heldavailable in stock by abusiness. 7t is also used for a list of the contents of a householdand for a list for testamentarypurposes of the possessions of someone who has died. 7naccounting inventory is considered an asset.
Contents
hide!
" rigins of the word 7nventory
& Dusiness inventory
o &." /he reasons for keeping stock
o &.& Special terms used in dealing with inventory
o &.' /ypology
o &.; 7nventory e+amples
&.;." (anufacturing &.;.& Cogistics or distribution
o &.> 4igh level inventory management
o &. #ccounting perspectives
&.." /he basis of 7nventory accounting &..& #ccounting for 7nventory &..' Financial accounting
' /he role of a cost accountant on the &"st2century in a manufacturing
organi3ationo '." F7F vs. C7F accounting
o '.& Standard cost accounting
o '.' /heory of $onstraints cost accounting
; 6ational accounts
> Eistressed inventory
7nventory credit
@ See also
A )eferences
9 Further reading
http://en.wikipedia.org/wiki/Value_chainhttp://en.wikipedia.org/wiki/Inventory#column-one#column-onehttp://en.wikipedia.org/wiki/Inventory#column-one#column-onehttp://en.wikipedia.org/wiki/Inventory#searchInput#searchInputhttp://en.wikipedia.org/wiki/Inventory_(disambiguation)http://en.wikipedia.org/wiki/Overstock.comhttp://en.wikipedia.org/wiki/Overstock.comhttp://en.wikipedia.org/wiki/Overstock.comhttp://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Materialshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Will_(law)http://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Assethttp://toggletoc%28%29/http://en.wikipedia.org/wiki/Inventory#Origins_of_the_word_Inventory#Origins_of_the_word_Inventoryhttp://en.wikipedia.org/wiki/Inventory#Business_inventory#Business_inventoryhttp://en.wikipedia.org/wiki/Inventory#The_reasons_for_keeping_stock#The_reasons_for_keeping_stockhttp://en.wikipedia.org/wiki/Inventory#Special_terms_used_in_dealing_with_inventory#Special_terms_used_in_dealing_with_inventoryhttp://en.wikipedia.org/wiki/Inventory#Typology#Typologyhttp://en.wikipedia.org/wiki/Inventory#Inventory_examples#Inventory_exampleshttp://en.wikipedia.org/wiki/Inventory#Manufacturing#Manufacturinghttp://en.wikipedia.org/wiki/Inventory#Logistics_or_distribution#Logistics_or_distributionhttp://en.wikipedia.org/wiki/Inventory#High_level_inventory_management#High_level_inventory_managementhttp://en.wikipedia.org/wiki/Inventory#Accounting_perspectives#Accounting_perspectiveshttp://en.wikipedia.org/wiki/Inventory#The_basis_of_Inventory_accounting#The_basis_of_Inventory_accountinghttp://en.wikipedia.org/wiki/Inventory#Accounting_for_Inventory#Accounting_for_Inventoryhttp://en.wikipedia.org/wiki/Inventory#Financial_accounting#Financial_accountinghttp://en.wikipedia.org/wiki/Inventory#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organization#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organizationhttp://en.wikipedia.org/wiki/Inventory#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organization#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organizationhttp://en.wikipedia.org/wiki/Inventory#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organization#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organizationhttp://en.wikipedia.org/wiki/Inventory#FIFO_vs._LIFO_accounting#FIFO_vs._LIFO_accountinghttp://en.wikipedia.org/wiki/Inventory#Standard_cost_accounting#Standard_cost_accountinghttp://en.wikipedia.org/wiki/Inventory#Theory_of_Constraints_cost_accounting#Theory_of_Constraints_cost_accountinghttp://en.wikipedia.org/wiki/Inventory#National_accounts#National_accountshttp://en.wikipedia.org/wiki/Inventory#Distressed_inventory#Distressed_inventoryhttp://en.wikipedia.org/wiki/Inventory#Inventory_credit#Inventory_credithttp://en.wikipedia.org/wiki/Inventory#See_also#See_alsohttp://en.wikipedia.org/wiki/Inventory#References#Referenceshttp://en.wikipedia.org/wiki/Inventory#Further_reading#Further_readinghttp://en.wikipedia.org/wiki/Value_chainhttp://en.wikipedia.org/wiki/Inventory#column-one#column-onehttp://en.wikipedia.org/wiki/Inventory#searchInput#searchInputhttp://en.wikipedia.org/wiki/Inventory_(disambiguation)http://en.wikipedia.org/wiki/Overstock.comhttp://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Materialshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Will_(law)http://en.wikipedia.org/wiki/Assethttp://toggletoc%28%29/http://en.wikipedia.org/wiki/Inventory#Origins_of_the_word_Inventory#Origins_of_the_word_Inventoryhttp://en.wikipedia.org/wiki/Inventory#Business_inventory#Business_inventoryhttp://en.wikipedia.org/wiki/Inventory#The_reasons_for_keeping_stock#The_reasons_for_keeping_stockhttp://en.wikipedia.org/wiki/Inventory#Special_terms_used_in_dealing_with_inventory#Special_terms_used_in_dealing_with_inventoryhttp://en.wikipedia.org/wiki/Inventory#Typology#Typologyhttp://en.wikipedia.org/wiki/Inventory#Inventory_examples#Inventory_exampleshttp://en.wikipedia.org/wiki/Inventory#Manufacturing#Manufacturinghttp://en.wikipedia.org/wiki/Inventory#Logistics_or_distribution#Logistics_or_distributionhttp://en.wikipedia.org/wiki/Inventory#High_level_inventory_management#High_level_inventory_managementhttp://en.wikipedia.org/wiki/Inventory#Accounting_perspectives#Accounting_perspectiveshttp://en.wikipedia.org/wiki/Inventory#The_basis_of_Inventory_accounting#The_basis_of_Inventory_accountinghttp://en.wikipedia.org/wiki/Inventory#Accounting_for_Inventory#Accounting_for_Inventoryhttp://en.wikipedia.org/wiki/Inventory#Financial_accounting#Financial_accountinghttp://en.wikipedia.org/wiki/Inventory#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organization#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organizationhttp://en.wikipedia.org/wiki/Inventory#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organization#The_role_of_a_cost_accountant_on_the_21st-century_in_a_manufacturing_organizationhttp://en.wikipedia.org/wiki/Inventory#FIFO_vs._LIFO_accounting#FIFO_vs._LIFO_accountinghttp://en.wikipedia.org/wiki/Inventory#Standard_cost_accounting#Standard_cost_accountinghttp://en.wikipedia.org/wiki/Inventory#Theory_of_Constraints_cost_accounting#Theory_of_Constraints_cost_accountinghttp://en.wikipedia.org/wiki/Inventory#National_accounts#National_accountshttp://en.wikipedia.org/wiki/Inventory#Distressed_inventory#Distressed_inventoryhttp://en.wikipedia.org/wiki/Inventory#Inventory_credit#Inventory_credithttp://en.wikipedia.org/wiki/Inventory#See_also#See_alsohttp://en.wikipedia.org/wiki/Inventory#References#Referenceshttp://en.wikipedia.org/wiki/Inventory#Further_reading#Further_reading7/25/2019 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"8 *+ternal links
[edit] Origins of the ord Inventory
/he word inventory was first recorded in "8". /he French term inventaire, or Gdetailedlist of goods,G dates back to ";">.
[edit] !usiness inventory
[edit] "he reasons for keeping stock
/here are three basic reasons for keeping an inventory:
". /ime 2 /he time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amount of inventory to use in this GleadtimeG
&. Hncertainty 2 7nventories are maintained as buffers to meet uncertainties indemand, supply and movements of goods.
'. *conomies of scale 2 7deal condition of Gone unit at a time at a place where userneeds it, when he needs itG principle tends to incur lots of costs in terms oflogistics. So bulk buying, movement and storing brings in economies of scale,thus inventory.
#ll these stock reasons can apply to any owner or product stage.
!uffer stockis held in individual workstations against the possibility that theupstream workstation may be a little delayed in long setup or change2over time./his stock is then used while that change2over is happening. /his stock can beeliminated by tools like S(*E.
/hese classifications apply along the whole Supply chainnot 0ust within a facility orplant.
Where these stocks contain the same or similar items it is often the work practice to holdall these stocks mi+ed together before or after the sub2process to which they relate. /his1reduces1 costs. Decause they are mi+ed2up together there is no visual reminder to
operators of the ad0acent sub2processes or line management of the stock which is due to aparticular cause and should be a particular individual1s responsibility with inevitableconsequences. Some plants have centrali3ed stock holding across sub2processes whichmakes the situation even more acute.
[edit] Special terms used in dealing ith inventory
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!toc eeping #nit SIH- is a unique combination of all the components that are
assembled into the purchasable item. /herefore any change in the packaging orproduct is a new SIH. /his level of detailed specification assists in managinginventory.
!tocoutmeans running out of the inventory of an SIH."!
G6ew old stockG sometimes abbreviated 6S- is a term used in business to referto merchandise being offered for sale which was manufactured long ago but thathas never been used. Such merchandise may not be produced any more, and thenew old stock may represent the only market source of a particular item at thepresent time.
[edit] "ypology
". Duffer=safety stock&. $ycle stock Hsed in batch processes, it is the available inventory e+cluding
buffer stock-
'. Ee2coupling Duffer stock that is held by both the supplier and the user-;. #nticipation stock building up e+tra stock for periods of increased demand 2 e.g.
ice cream for summer->. ipeline stock goods still in transit or in the process of distribution 2 have left the
factory but not arrived at the customer yet-
[edit] Inventory e#amples
While accountantsoften discuss inventory in terms of goods for sale, organi3ations 2manufacturers, service2providersand not2for2profits2 also have inventories fi+tures,furniture, supplies, ...- that they do not intend to sell. (anufacturers1, distributors1, and
wholesalers1 inventory tends to cluster in warehouses. )etailers1inventory may e+ist in awarehouse or in a shopor store accessible to customers. 7nventories not intended for saleto customers or to clientsmay be held in any premises an organi3ation uses. Stock ties upcash and if uncontrolled it will be impossible to know the actual level of stocks andtherefore impossible to control them.
Whilst the reasons for holding stock are covered earlier, most manufacturingorgani3ations usually divide their Ggoods for saleG inventory into:
)aw materials 2 materials and components scheduled for use in making a product.
Work in process, W7 2 materials and components that have begun their
transformation to finished goods. Finished goods 2 goods ready for sale to customers.
?oods for resale 2 returned goods that are salable.
Spare parts
For e+ample:
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[edit] Manufacturing
# canned food manufacturer1s materials inventory includes the ingredients to form thefoods to be canned, empty cans and their lids or coils of steel or aluminum forconstructing those components-, labels, and anything else solder, glue, ...- that will form
part of a finished can. /he firm1s work in process includes those materials from the timeof release to the work floor until they become complete and ready for sale to wholesale orretail customers. /his may be vats of prepared food, filled cans not yet labelled or sub2assemblies of food components. 7t may also include finished cans that are not yetpackaged into cartons or pallets. 7ts finished good inventory consists of all the filled andlabelled cans of food in its warehouse that it has manufactured and wishes to sell to fooddistributors wholesalers-, to grocery stores retailers-, and even perhaps to consumersthrough arrangements like factory storesand outlet centers.
[edit] $ogistics or distri%ution
/he logisticschain includes the owners wholesalers and retailers-, manufacturers1 agents,and transportation channels that an item passes through between initial manufacture andfinal purchase by a consumer. #t each stage, goods belong as assets- to the seller untilthe buyer accepts them. Eistribution includes four components:
". (anufacturers1 agents: Eistributors who hold and transport a consignment offinished goods for manufacturers without ever o$ningit. #ccountants refer tomanufacturers1 agents1 inventory as GmatrielG in order to differentiate it fromgoods for sale.
&. /ransportation:/he movement of goods between owners, or between locations ofa given owner. /he seller owns goods in transituntil the buyer accepts them.
Sellers or buyers may transport goods but most transportation providers act as theagent of the owner of the goods.
'. Wholesaling: Eistributors who buy goods from manufacturers and other suppliersfarmers, fishermen, etc.- for re2sale work in the wholesaleindustry. #wholesaler1s inventory consists of all the products in its warehouse that it haspurchased from manufacturers or other suppliers. # produce2wholesaler ordistributor- may buy from distributors in other parts of the world or from localfarmers. Food distributors wish to sell their inventory to grocery stores, otherdistributors, or possibly to consumers.
;. )etailing: # retailer1s inventory of goods for sale consists of all the products on itsshelves that it has purchased from manufacturers or wholesalers. /he store
attempts to sell its inventory soup, bolts, sweaters, or other goods- to consumers.
7t is a key observation in the GCean (anufacturingG that it is often the case that more than98K of a product1s life prior to end user sale is spent in distribution of one form oranother. n the assumption that the time is not itself valuable to the customer this addsenormously to the working capital tied up in the business as well as the comple+ity of thesupply chain. )eduction and elimination of these inventory 1wait1 states is a key conceptin Cean.
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[edit] &igh level inventory management
7t seems that around about "AA8&!there was a change in manufacturing practice fromcompanies with relatively homogeneous lines of products to vertically integratedcompanies with unprecedented diversity in processes and products. /hose companies
especially in metalworking- attempted to achieve success through economies of scope 2the gains of 0ointly producing two or more products in one facility. /he managers nowneeded information on the effect of product mi+ decisions on overall profits and thereforeneeded accurate product cost information. # variety of attempts to achieve this wereunsuccessful due to the huge overhead of the information processing of the time.4owever, the burgeoning need for financial reporting after "988 created unavoidablepressure for financial accountingof stock and the management need to cost manageproducts became overshadowed. 7n particular it was the need for audited accounts thatsealed the fate of managerial cost accounting. /he dominance of financial reportingaccounting over management accountingremains to this day with few e+ceptions and thefinancial reporting definitions of 1cost1 have distorted effective management 1cost1
accounting since that time. /his is particularly true of inventory.
4ence high level financial inventory has these two basic formulas which relate to theaccounting period:
". $ost of Deginning 7nventoryat the start of the period L inventorypurchaseswithin the period L cost ofproductionwithin the period M cost of goods
&. $ost of goods N cost of ending inventoryat the end of the period M cost of goodssold
/he benefit of these formulae is that the first absorbs all overheads of production and raw
material costs in to a value of inventory for reporting. /he second formula then createsthe new start point for the ne+t period and gives a figure to be subtracted from sales priceto determine some form of sales margin figure.
(anufacturing management is more interested in inventory turnover ratioor averagedays to sell inventorysince it tells them something about relative inventory levels.
7nventory turn over ratio also known as inventory turns- M cost of goods sold =#verage 7nventory M $ost of ?oods Sold = Deginning 7nventory L *nding7nventory- = &-
and its inverse
#verage Eays to Sell 7nventory M 6umber of Eays a Oear = 7nventory /urn ver)atio M '> days a year = 7nventory /urn ver )atio
/his ratio estimates how many times the inventory turns over a year. /his number tells ushow much cash=goods are tied up waiting for the process and is a critical measure ofprocess reliability and effectiveness. So a factory with two inventory turns has si+ months
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stock on hand which generally not a good figure depending upon industry- whereas afactory that moves from si+ turns to twelve turns has probably improved effectiveness by"88K. /his improvement will have some negative results in the financial reporting sincethe 1value1 now stored in the factory as inventory is reduced.
Whilst the simplicity of these accounting measures of inventory are very useful they arein the end fraught with the danger of their own assumptions. /here are in fact so manythings which can vary hidden under this appearance of simplicity that a variety of1ad0usting1 assumptions may be used. /hese include:
Specific 7dentification
Weighted #verage $ost
(oving2#verage $ost
F7F and C7F.
7nventory /urn is a financial accounting tools for evaluating inventory and it is not
necessarily a management tool. 7nventory management should be forward looking. /hemethodology applied is based on historical cost of goods sold. /he ratio may not be ableto reflect the usability of future production demand as well as customer demand.
Dusiness models including Just in /ime J7/- 7nventory, Bendor (anaged 7nventoryB(7- and $ustomer (anaged 7nventory $(7- attempt to minimi3e on2hand inventoryand increase inventory turns. B(7 and $(7 have gained considerable attention due to thesuccess of third party vendors who offer added e+pertise and knowledge thatorgani3ations may not possess.
[edit] Accounting perspectives
[edit] "he %asis of Inventory accounting
7nventory needs to be accounted where it is held across accounting period boundariessince generally e+penses should be matched against the results of that e+pense within thesame period. When processes were simple and short then inventories were small but withmore comple+ processes then inventories became larger and significant valued items onthe balance sheet'!. /his need to value unsold and incomplete goods has driven manynew behaviours into management practise. erhaps most significant of these are thecomple+ities of fi+ed cost recovery, transfer pricing, and the separation of direct fromindirect costs. /his, supposedly, precluded Ganticipating incomeG or Gdeclaring dividends
out of capitalG. 7t is one of the intangible benefits ofCeanand the/Sthat process timesshorten and stock levels decline to the point where the importance of this activity ishugely reduced and therefore effort, especially managerial, to achieve it can beminimised.
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[edit] Accounting for Inventory
*ach country has its own rules aboutaccountingfor inventory that fit with their financialreporting rules.
So for e+ample, organi3ations in the H.S. define inventoryto suit their needs within HS?enerally #ccepted #ccounting ractices?##-, the rules defined by the Financial#ccounting Standards DoardF#SD- and others- and enforced by theH.S. Securitiesand *+change $ommissionS*$- and other federal and state agencies. ther countriesoften have similar arrangements but with their own ?## and national agencies instead.
7t is intentional that financial accountinguses standards that allow the public to comparefirms1 performance, cost accountingfunctions internally to an organi3ation andpotentially with much greater fle+ibility. # discussion of inventory from standard and/heory of $onstraints2based throughput- cost accountingperspective follows somee+amples and a discussion of inventory from afinancial accountingperspective.
/he internal costing=valuation of inventory can be comple+. Whereas in the past mostenterprises ran simple one process factories, this is quite probably in the minority in the&"st century. Where 1one process1 factories e+ist then there is a market for the goodscreated which establishes an independent market value for the good. /oday with multi2stage process companies there is much inventory that would once have been finishedgoods which is now held as 1work2in2process1 W7-. /his needs to be valued in theaccounts but the valuation is a management decision since there is no market for thepartially finished product. /his somewhat arbitrary 1valuation1 of W7 combined with theallocation of overheads to it has led to some unintended and undesirable results.
[edit] 'inancial accounting
#n organi3ation1s inventory can appear a mi+ed blessing, since it counts as anassetonthebalance sheet, but it also ties up money that could serve for other purposes andrequires additional e+pense for its protection. 7nventory may also cause significant ta+e+penses, depending on particular countries1 laws regarding depreciation of inventory, asin/hor ower /ool $ompany v. $ommissioner.
7nventory appears as acurrent asseton an organi3ation1s balance sheet because theorgani3ation can, in principle, turn it into cash by selling it. Some organi3ations holdlarger inventories than their operations require in order to inflate their apparent asset
value and their perceived profitability.
7n addition to the money tied up by acquiring inventory, inventory also brings associatedcosts for warehouse space, for utilities, and for insuranceto cover staff to handle andprotect it, fire and other disasters, obsolescence, shrinkage theft and errors-, and others.Such holding costscan mount up: between a third and a half of its acquisition value peryear.
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Dusinesses that stock too little inventory cannot take advantage of large orders fromcustomers if they cannot deliver. /he conflicting ob0ectives of cost control and customerservice often pit an organi3ation1s financial and operating managers against its salesandmarketingdepartments. Sales people, in particular, often receive sales commissionpayments, so unavailable goods may reduce their potential personal income. /his conflict
can be minimised by reducing production time to being near or less than customere+pected delivery time. /his effort, known as GCean productionG will significantly reduceworking capitaltied up in inventory and reduce manufacturing costs See the/oyotaroduction System-.
[edit] "he role of a cost accountant on the ()st*century
in a manufacturing organi+ation
Dy helping the organi3ation to make better decisions, the accountants can help the publicsector to change in a very positive way that delivers increased value for the ta+payerPs
investment. 7t can also help to incentivise progress and to ensure that reforms aresustainable and effective in the long term, by ensuring that success is appropriatelyrecogni3ed in both the formal and informal reward systems of the organi3ation.
/o say that they have a key role to play is an understatement. Finance is connected tomost, if not all, of the key business processes within the organi3ation. 7t should besteering the stewardship and accountability systems that ensure that the organi3ation isconducting its business in an appropriate, ethical manner. 7t is critical that thesefoundations are firmly laid. So often they are the litmus test by which public confidencein the institution is either won or lost.
Finance should also be providing the information, analysis and advice to enable theorgani3ationsP service managers to operate effectively. /his goes beyond the traditionalpreoccupation with budgets Q how much have we spent so far, how much have we left tospendR 7t is about helping the organi3ation to better understand its own performance. /hatmeans making the connections and understanding the relationships between given inputsQ the resources brought to bear Q and the outputs and outcomes that they achieve. 7t isalso about understanding and actively managing risks within the organi3ation and itsactivities.
[edit] 'I'O vs, $I'O accounting
(ain article: F7F and C7F accounting
When a dealer sells goods from inventory, the value of the inventory is reduced by thecost of goods sold$o? sold-. /his is simple where the $o? has not varied across thoseheld in stock< but where it has, then an agreed method must be derived to evaluate it. Forcommodityitems that one cannot track individually, accountants must choose a methodthat fits the nature of the sale. /wo popular methods which normally e+ist are: F7F andC7F accountingfirst in 2 first out, last in 2 first out-. F7F regards the first unit thatarrived in inventory as the first one sold. C7F considers the last unit arriving in
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inventory as the first one sold. Which method an accountant selects can have a significanteffect on net income andbook valueand, in turn, on ta+ation. Hsing C7F accounting forinventory, a company generally reports lower net income and lower book value, due tothe effects of inflation. /his generally results in lower ta+ation. Eue to C7F1s potential toskew inventory value, HI ?##and 7#Shave effectively banned C7F inventory
accounting.
[edit] Standard cost accounting
Standard cost accounting uses ratioscalledefficienciesthat compare the labour andmaterials actually used to produce a good with those that the same goods would haverequired under GstandardG conditions. #s long as similar actual and standard conditionsobtain, few problems arise. Hnfortunately, standard cost accounting methods developedabout "88 years ago, when labor comprised the most important cost in manufacturedgoods. Standard methods continue to emphasi3e labor efficiency even though thatresource now constitutes a very- small part of cost in most cases.
Standard cost accounting can hurt managers, workers, and firms in several ways. Fore+ample, a policy decision to increase inventory can harm a manufacturing managers1performance evaluation. 7ncreasing inventory requires increased production, whichmeans that processes must operate at higher rates. When not if- something goes wrong,the process takes longer and uses more than the standard labor time. /he manager appearsresponsible for the e+cess, even though s=he has no control over the productionrequirement or the problem.
7n adverse economic times, firms use the same efficiencies to downsi3e, rightsi3e, orotherwise reduce their labor force. Workers laid off under those circumstances have even
less control over e+cess inventory and cost efficiencies than their managers.
(any financial and cost accountants have agreed for many years on the desirability ofreplacing standard cost accounting. /hey have not, however, found a successor.
[edit] "heory of Constraints cost accounting
*liyahu (. ?oldrattdeveloped the /heory of $onstraintsin part to address the cost2accounting problems in what he calls the Gcost worldG. 4e offers a substitute, calledthroughput accounting,that uses throughputmoney for goods sold to customers- in placeof output goods produced that may sell or may boost inventory- and considers labor as a
fi+ed rather than as a variable cost. 4e defines inventory simply as everything theorgani3ation owns that it plans to sell, including buildings, machinery, and many otherthings in addition to the categories listed here. /hroughput accounting recogni3es onlyone class of variable costs: the trully variable costs like materials and components thatvary directly with the quantity produced.
Finished goods inventories remainbalance2sheetassets, but labor efficiency ratios nolonger evaluate managers and workers. 7nstead of an incentive to reduce labor cost,
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throughput accounting focuses attention on the relationships between throughputrevenue or income- on one hand and controllable operating e+penses and changes ininventory on the other. /hose relationships direct attention to theconstraintsorbottlenecksthat prevent the system from producing more throughput, rather than topeople 2 who have little or no control over their situations.
[edit] -ational accounts
7nventories also play an important role in national accountsand the analysis of thebusiness cycle. Some short2term macroeconomicfluctuations are attributed to theinventory cycle.
[edit] .istressed inventory
#lso known as distressed or e+pired stock, distressed inventory is inventory whose
potential to be sold at a normalcosthas or will soon pass. 7n certain industries it couldalso mean that the stock is or will soon be impossible to sell. *+amples of distressedinventory include products that have reached its e+piry date, or has reached a date inadvance of e+piry at which the planned market will no longer purchase it e.g. ' monthsleft to e+piry-, clothing that is defective or out offashion, and old newspapers ormaga3ines. 7t also includes computer or consumer2electronic equipment that isobsolescent or discontinued and whose manufacturer is unable to support it. ne currente+ample of distressed inventory is theB4Sformat.;!
[edit] Inventory credit
7nventory credit refers to the use of stock, or inventory, as collateralto raise finance.Where banks may be reluctant to accept traditional collateral, for e+ample in developingcountrieswhere land titlemay be lacking, inventory credit is a potentially important wayof overcoming financing constraints. /his is not a new concept< archaeological evidencesuggests that it was practiced in #ncient )ome. btaining finance against stocks of awide range of products held in abonded warehouseis common in much of the world. 7tis, for e+ample, used with parmesan cheese in 7taly.>!7nventory credit on the basis ofstored agricultural produce is widely used in Catin #merican countries and in some #siancountries. !# precondition for such credit is that banks must be confident that the storedproduct will be available if they need to call on the collateral< this implies the e+istence ofa reliable network of certified warehouses. Danks also face problems in valuing the
inventory. /he possibility of sudden falls in commodity prices means that they are usuallyreluctant to lend more than about 8K of the value of the inventory at the time of theloan.
Stock management
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material may be challengedand removed.(October %&&')
Stock managementis the function of understanding the stock mi+of a company and thedifferent demandson that stock. /he demands are influenced by both e+ternalandinternalfactors and are balanced by the creation of urchase order requeststo keepsupplies at a reasonable or prescribed level.
Contents
hide!
" )etail supply chain
o "." Weighted #verage rice (ethod
& Software applications
' Dusiness models
; )eferences
[edit] /etail supply chain
Stock management in the retail supply chain follows the following sequence:
". )equest for new stock from stores to head office&. 4ead office issues purchase orders to the vendor'. Bendor ships the goods;. Warehouse receives the goods>. Warehouse stocks and distributes to the stores. Stores receive the goods@. ?oods are sold to customers at the stores
/he management of the inventory in the supply chain involves managing the physicalquantities as well as the costing of the goods as it flows through the supply chain.
7n managing the cost prices of the goods throughout the supply chain, several costingmethods are employed:
". )etail method&. Weighted #verage rice method'. F7F First 7n First ut- method;. C7F Cast 7n First ut- method
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>. C Cast urchase rice- method. D6( Dottle neck method-
/his is able to going with closer lead time of procurement on this method we save thecompany money very much, for this method we have to make a proper plan of their
requirements, we plan for sub divisional equipments and less important products ofconcern but it must be plan the date of availability and near by vendor,to save money
[edit] Weighted Average 0rice Method
/he calculation can be done for different periods. 7f the calculation is done on a monthlybasis, then it is referred to the periodic method. 7n this method, the available stock iscalculated by:
#EE Stock at beginning of period#EE Stock purchased during the period
#B*)#?* total cost by total qty to arrive at the #verage $ost of ?oods for the period.
/his #verage $ost rice is applied to all movements and ad0ustments in that period.*nding stock in qty is arrived at by #pplying all the changes in qty to the #vailablebalance.(ultiplying the stock balance in qty by the #verage cost gives the Stock cost at the end ofthe period.
Hsing the perpetual method, the calculation is done upon every purchase transaction.
/hus, the calculation is the same based on the periodic calculation whether by period
periodic- or by transaction perpetual-.
/he only difference is the 1periodicity1 or scope of the calculation. 2 eriodic is donemonthly 2 erpetual is done for the duration of the purchase until the ne+t purchase
7n practice, the daily averaging has been used to closely appro+imate the perpetualmethod. . Dottle neck method depends on proper planning support-
[edit] Softare applications
/he implementation of inventory management applications has become a valuable tool
for organi3ations looking to more efficiently manage stock. While the capabilities ofapplications vary, most inventory management applications give organi3ations astructured method of accounting for all incoming and outgoing inventory within theirfacilities. rgani3ations save a significant amount in costs associated with manualinventory counts, administrative errors and reductions in inventory stock2outs.
[edit] !usiness models
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Just2in2time 7nventory J7/-, Bendor (anaged 7nventory B(7- and $ustomer (anaged7nventory $(7- are a few of the popular models being employed by organi3ationslooking to have greater stock management control.
J7/ is a model which attempts to replenish inventory for organi3ations when the
inventory is required. /he model attempts to avoid e+cess inventory and its associatedcosts. #s a result, companies receive inventory only when the need for more stock isapproaching.
B(7 and $(7 are two business models that adhere to the J7/ inventory principles. B(7gives the vendor in a vendor=customer relationship the ability to monitor, plan and controlinventory for their customers. $ustomers relinquish the order making responsibilities ine+change for timely inventory replenishment that increases organi3ational efficiency.
$(7 allows the customer to order and control their inventory from theirvendors=suppliers. Doth B(7 and $(7 benefit the vendor as well as the customer.
Bendors see a significant increase in sales due to increased inventory turns and costsavings reali3ed by their customers, while customers reali3e similar benefits.
'I'O and $I'O accounting
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'I'O and $I'O accountingmethods are means of managing inventory and financialmatters involving the money a company ties up within inventory of produced goods, rawmaterials, parts, components, or feed stocks. F7F stands for first2in, first2out, meaningthat the oldest inventory items are recorded as sold first. C7F stands for last2in, first2out,meaning that the most recently purchased items are recorded as sold first. Since the"9@8s, H.S. companies have tended to use C7F, which reduces their income ta+es intimes of inflation."!
Contents
hide!
" C7F accounting
& F7F accounting
' C7F liquidation
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; See also
> )eferences
[edit] $I'O accounting
C7F is an acronymfor Glast in, first out.G Sometimes the term 'I$OGfirst in, last outG-is used synonymously.- 7n $I'O accounting, a historical method of recording the valueof inventory, a firm records the last units purchased as the first units sold. C7Faccounting is in contrast to the method 'I'O accountingcovered below.
Since prices generally rise over time because of inflation, this method records the sale ofthe most e+pensive inventory first and thereby decreases profit and reduces ta+es.4owever, this method rarely reflects the physical flow of indistinguishable items.
C7F valuation is permitted in the belief that an ongoing business does not reali3e aneconomic profit solely from inflation. When prices are increasing, they must replaceinventory currently being sold with higher priced goods. C7F better matches currentcost against current revenue. 7t also defers paying ta+es on phantom income arising solelyfrom inflation. C7F is attractive to business in that it delays a ma0or detrimental effect ofinflation, namely higher ta+es. 4owever, in a very long run, both methods converge.
Cast in first outT C7F- is not acceptable in the 7F)S.&!
[edit] 'I'O accounting
'I'O accountingis a common method for recording the value of inventory. 7t isappropriate where there are many different batches of similar products. /he methodpresumes that the ne+t item to be shipped will be the oldest of that type in the warehouse.7n practice, this usually reflects the underlying commercial substance of the transaction,since many companies rotate their inventory especially of perishable goods-. /his is stillnot in contrast to C7F because F7F and C7F are cost flow assumptions not productflow assumptions.
7n an economy of rising prices during inflation-, it is common for beginning companiesto use F7F for reporting the value of merchandise to bolster their balance sheet. #s theolder and cheaper goods are sold, the newer and more e+pensive goods remain as assets
on the company1s books. 4aving the higher valued inventory and the lower cost of goodssold on the company1s financial statements may increase the chances of getting a loan.4owever, as it prospers the company may switch to C7F to reduce the amount of ta+es itpays to the government.
[edit] $I'O li1uidation
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6otwithstanding itsdeferred ta+advantage, a C7F inventory system can lead to C7Fliquidation, a situation where in the absence of new replacement inventory or a search forincreased profits, older inventory is increasingly liquidated or sold-. 7f prices have beenrising, for e+ample through inflation, this older inventory will have a lower cost, and itsliquidation will lead to the recognition of higher net income and the payment of higher
ta+es, thus reversing the deferred ta+ advantage that initially encouraged the adoption of aC7F system. Some companies who use C7F have decades2old inventory recorded ontheir books at a very low cost. For these companies a C7F liquidation would result in aninflated net income and higher ta+ payments. /his situation is usually undesirable< on rareoccasions a company in financial stress could abuse this method to temporarily increaseincome
2ust*in*time 3%usiness4
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/his article includes a list of referencesor e+ternal links,but its sources remainunclear %ecause it lacksinline citations,lease improvethis article by introducingmore precise citations where appropriate. (arch %&&*)
Corporate finance
Working capital management
$ash conversion cycle)eturn on capital
*conomic value addedJust 7n /ime
*conomic order quantityEiscounts and allowances
Factoring finance-
Capital %udgeting
$apital investment decisions/he investment decision
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/he financing decision
Sections
(anagerial financeFinancial accounting
(anagement accounting(ergers and acquisitions
Dalance sheet analysisDusiness plan
$orporate action
'inanceseries
Financial marketFinancial market participants$orporate financeersonal financeublic finance
Danks and DankingFinancial regulation
/his bo+:viewUtalkUedit
2ust*in*time2I"- is an inventory strategy implemented to improve thereturn on
investmentof abusinessby reducing in2process inventoryand its associated carryingcosts. 7n order to achieve J7/ the process must have signals of what is going on elsewherewithin the process. /his means that the process is often driven by a series of signals,which can be Ianbananban?-, that tell production processes when to make thene+t part. Ianban are usually 1tickets1 but can be simple visual signals, such as thepresence or absence of a part on a shelf. When implemented correctly, J7/ can lead todramatic improvements in a manufacturing organi3ation1s return on investment,quality,and efficiency.
%uick communication of the consumption of old stock which triggers new stock to beordered is key to J7/ and inventory reduction. /his saves warehousespace and costs.
4owever since stock levels are determined by historical demand,any sudden demandrises above the historical averagedemand, the firm will deplete inventory faster thanusual and cause customer serviceissues. Some"!have suggested that recycling Ianbanfaster can also help fle+ the system by as much as "82'8K. 7n recent years manufacturershave touted a trailing "' week average as a better predictor for J7/ planning than mostforecastors could provide.&!
http://en.wikipedia.org/wiki/Corporate_finance#The_financing_decisionhttp://en.wikipedia.org/wiki/Managerial_financehttp://en.wikipedia.org/wiki/Financial_accountancyhttp://en.wikipedia.org/wiki/Management_accountinghttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Business_planhttp://en.wikipedia.org/wiki/Corporate_actionhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_market_participantshttp://en.wikipedia.org/wiki/Corporate_financehttp://en.wikipedia.org/wiki/Personal_financehttp://en.wikipedia.org/wiki/Public_financehttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Template:Corporate_financehttp://en.wikipedia.org/wiki/Template:Corporate_financehttp://en.wikipedia.org/wiki/Template_talk:Corporate_fi
