Inventory Management What Am I Going to do with All this Stuff?
Presented by Andrew W. Repak, CPA, CMA, CFM, VCO
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Logistics
• lo·gis·tics ləˈjistiks/, noun, the detailed coordination of a complex operation involving many people, facilities, or supplies. synonyms:organization, planning, plans, management, arrangement, administration, orchestration, coordination, execution, handling, running "the logistics of deploying forces in the field“
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Department of Accounts (DOA) Guidance
• Topic No. 30505, Physical Inventory • Topic No. 30515, Supplies and Materials Inventory
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•The most important thing
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•The most important thing •Types of operations
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•The most important thing •Types of operations •Inventory systems
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•The most important thing •Types of operations •Inventory systems •Inventory processes
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•The most important thing •Types of operations •Inventory systems •Inventory processes •Performance measurements
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•The most important thing •Types of operations •Inventory systems •Inventory processes •Performance measurements •Obsolescence
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THE MOST IMPORTANT
THING
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The Most Important Thing
Know Your Customers
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Types of Operations
Warehouse
Distribution Center
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Types of Operations
Warehouse • Static storage
Distribution Center • Focus on distributing items
quickly
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Types of Operations
Warehouse • Static storage
• Slower turn around
Distribution Center • Focus on distributing items
quickly • Faster turn around
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Types of Operations
Warehouse • Static storage
• Slower turn around • Higher holding costs
Distribution Center • Focus on distributing items
quickly • Faster turn around • Lower holding costs
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Types of Operations
Warehouse • Static storage
• Slower turn around • Higher holding costs • Tie up funds
Distribution Center • Focus on distributing items
quickly • Faster turn around • Lower holding costs • Less funds tied up
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Types of Operations
Warehouse • Static storage
• Slower turn around • Higher holding costs • Tie up funds • Inventory for emergency use
Distribution Center • Focus on distributing items
quickly • Faster turn around • Lower holding costs • Less funds tied up
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Type of Operation - Simple
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Type of Operation - Complex
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Physical Safety and Security
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Physical Safety and Security
•Protect employees and visitors from injury
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE)
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE)
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking •Hazardous materials
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking •Hazardous materials
•Protect the inventory from theft
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking •Hazardous materials
•Protect the inventory from theft •Control access to storage areas
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking •Hazardous materials
•Protect the inventory from theft •Control access to storage areas •Security cameras
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Physical Safety and Security
•Protect employees and visitors from injury •Personal protective equipment (PPE) •Material Handling Equipment (MHE) •Slips and trips •Inventory on shelves or racking •Hazardous materials
•Protect the inventory from theft •Control access to storage areas •Security cameras •Guards
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Inventory Systems
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Inventory Systems
•Perpetual
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Inventory Systems
•Perpetual •Periodic
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Inventory System – Paper Records
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Inventory System – Paper Records
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Inventory System – Excel Spreadsheet
Widget Thingamabob Dodad WhatchamajigIn Stock 14 16 22 4Beginning Balance 10 15 20 25Tom -1 -3Dick -4 -3Harry -10George -8Purchase 5 5 5 5Sam (return) 3Pete -8
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Inventory System - COTS
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Inventory System - COTS
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Inventory System - COTS
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Inventory System - COTS
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Inventory System - COTS
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Inventory System - COTS
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Inventory System - COTS
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Inventory Processes
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Inventory Processes
•Receiving
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Inventory Processes
•Receiving •Quality Assurance
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Inventory Processes
•Receiving •Quality Assurance •Storage (put away)
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Inventory Processes
•Receiving •Quality Assurance •Storage (put away) •Stock Rotation
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Inventory Processes
•Receiving •Quality Assurance •Storage (put away) •Stock Rotation •Order fulfillment
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Inventory Processes
•Receiving •Quality Assurance •Storage (put away) •Stock Rotation •Order fulfillment •Quality Control
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Inventory Processes
•Receiving •Quality Assurance •Storage (put away) •Stock Rotation •Order fulfillment •Quality Control •Delivery
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Inventory Processes
•Receiving
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Inventory Processes
•Receiving •First line of defense
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Inventory Processes
•Receiving •First line of defense •Unloading the goods
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Inventory Processes
•Receiving •First line of defense •Unloading the goods
• trained staff
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Inventory Processes
•Receiving •First line of defense •Unloading the goods
• trained staff •material handling equipment
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Inventory Processes
•Receiving •First line of defense •Unloading the goods
• trained staff •material handling equipment
•The receiver should have a copy of the purchase order (PO)
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Inventory Processes
•Receiving •First line of defense •Unloading the goods
• trained staff •material handling equipment
•The receiver should have a copy of the purchase order (PO) •Compare delivery documentation, such as the PO & Bill of Lading (BOL), to the actual goods received.
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Inventory Processes
•Receiving (concluded) •Inspect the goods for quantity and damage.
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Inventory Processes
•Receiving (concluded) •Inspect the goods for quantity and damage. •Document the quantity and quality on the vendor’s paperwork and maintain a copy.
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Inventory Processes
•Receiving (concluded) •Inspect the goods for quantity and damage. •Document the quantity and quality on the vendor’s paperwork and maintain a copy.
•If you sign a BOL without noting any deficiencies, especially quantity differences, the vendor will invoice for the full amount.
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Inventory Processes
•Receiving (concluded) •Inspect the goods for quantity and damage. •Document the quantity and quality on the vendor’s paperwork and maintain a copy.
•If you sign a BOL without noting any deficiencies, especially quantity differences, the vendor will invoice for the full amount.
•Ensure goods are entered in your inventory system before they are used.
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Inventory Processes
•Quality Assurance
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Inventory Processes
•Quality Assurance
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Inventory Processes
•Quality Assurance
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Inventory Processes
•Storage (put away)
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored •Each location should only hold one specific item, when possible
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored •Each location should only hold one specific item, when possible
•Stock Rotation
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored •Each location should only hold one specific item, when possible
•Stock Rotation •FIFO
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored •Each location should only hold one specific item, when possible
•Stock Rotation •FIFO •LIFO
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Inventory Processes
•Storage (put away) •Put the items in the best place for retrieving them •Accurately record where the goods are stored •Each location should only hold one specific item, when possible
•Stock Rotation •FIFO •LIFO
•Order fulfillment
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Inventory Processes
•Quality Control
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Inventory Processes
•Quality Control •Check accuracy
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Inventory Processes
•Quality Control •Check accuracy
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Inventory Processes
•Quality Control •Check accuracy •Prepare for delivery
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Inventory Processes
•Delivery
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Inventory Processes
•Delivery •Proper handoffs
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Inventory Processes
•Delivery •Proper handoffs •Proof of delivery
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Inventory Counts
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Inventory Counts
•Full Inventory Counts
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Inventory Counts
•Full Inventory Counts •Cycle Counts
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Inventory Counts
•Full Inventory Counts •Cycle Counts
•Randomized schedule
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Inventory Counts
•Full Inventory Counts •Cycle Counts
•Randomized schedule •ABC Methodology (Pareto’s 80/20 Rule)
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Inventory Counts
•Full Inventory Counts •Cycle Counts
•Randomized schedule •ABC Methodology (Pareto’s 80/20 Rule)
Class % of Items % of $ Value A 10% 70% B 20% 20% C 70% 10%
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Discipline
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Forecasting
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Forecasting
•Communication with Customer
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Forecasting
•Communication with Customer •Usage rates
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Forecasting
0 5
10 15 20 25 30 35 40 45 50
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Day 11
Day 12
Day 13
Day 14
Day 15
Day 16
Day 17
Day 18
Day 19
Day 20
Quantity On Hand
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Forecasting
0 5
10 15 20 25 30 35 40 45 50
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Day 11
Day 12
Day 13
Day 14
Day 15
Day 16
Day 17
Day 18
Day 19
Day 20
Quantity On Hand
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Forecasting
•Communication with Customer •Usage rates
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Forecasting
•Communication with Customer •Usage rates •Lead time
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Forecasting
•Communication with Customer •Usage rates •Lead time
•Order processing time
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Forecasting
•Communication with Customer •Usage rates •Lead time
•Order processing time •Supplier lead time
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Forecasting
•Communication with Customer •Usage rates •Lead time
•Order processing time •Supplier lead time •Transportation time
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Forecasting
•Communication with Customer •Usage rates •Lead time
•Order processing time •Supplier lead time •Transportation time •Receiving time
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point
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Forecasting
0 5
10 15 20 25 30 35 40 45 50
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Day 11
Day 12
Day 13
Day 14
Day 15
Day 16
Day 17
Day 18
Day 19
Day 20
Quantity On Hand
Reorder Point
Reorder Point
Three Day Lead Time
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock
Low safety stock levels •High confidence in on-time delivery
•Low demand variance
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock
Low safety stock levels High safety stock levels •High confidence in on-time delivery
•Low demand variance
•Low confidence in on-time delivery
•High demand variance
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0 5
10 15 20 25 30 35 40 45 50
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Day 11
Day 12
Day 13
Day 14
Day 15
Day 16
Day 17
Day 18
Day 19
Day 20
Quantity On Hand
Safety Stock
Forecasting
Reorder Point
Reorder Point
Three Day Lead Time Safety Stock = 10 units
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock
Low safety stock levels High safety stock levels •High confidence in on-time delivery
•Low demand variance
•Low confidence in on-time delivery
•High demand variance
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock •Minimum Quantities
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock •Minimum Quantities •Maximum Quantities
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Forecasting
0 5
10 15 20 25 30 35 40 45 50
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Day 11
Day 12
Day 13
Day 14
Day 15
Day 16
Day 17
Day 18
Day 19
Day 20
Quantity On Hand
Safety Stock Minimum
Maximum
Reorder Point
Reorder Point
Three Day Lead Time Safety Stock = 10 units
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock •Minimum Quantities •Maximum Quantities
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock •Minimum Quantities •Maximum Quantities •Seasonal Demand
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Forecasting
•Communication with Customer •Usage rates •Lead time •Reorder point •Safety Stock •Minimum Quantities •Maximum Quantities •Seasonal Demand •Critical Path Method (CPM)
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Just In Time
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Just In Time
• Inventory delivered right when it is needed.
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate.
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate. • High quality usage with no mistakes.
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate. • High quality usage with no mistakes. • Must establish a relationship with a select number of suppliers
to make sure goods are definitely delivered on time.
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate. • High quality usage with no mistakes. • Must establish a relationship with a select number of suppliers
to make sure goods are definitely delivered on time. • Cost of delivery will be higher due to more frequent deliveries
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate. • High quality usage with no mistakes. • Must establish a relationship with a select number of suppliers
to make sure goods are definitely delivered on time. • Cost of delivery will be higher due to more frequent deliveries • Less likely to be able to take advantage of bulk rates
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Just In Time
• Inventory delivered right when it is needed. • Good for manufacturing with a steady production with a very
steady usage rate. • High quality usage with no mistakes. • Must establish a relationship with a select number of suppliers
to make sure goods are definitely delivered on time. • Cost of delivery will be higher due to more frequent deliveries • Less likely to be able to take advantage of bulk rates • Not appropriate for organizations required to receive three or
more bids.
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Performance Measurement
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Performance Measurement
Number of days = 365 In Inventory inventory turnover ratio
Total Asset = sales Turnover total assets
Working Capital = net sales Turnover average working capital
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Performance Measurement
Number of days = 365 In Inventory inventory turnover ratio
Total Asset = sales Turnover total assets
Working Capital = net sales Turnover average working capital
Current Ratio = current assets current liablilities
Acid Test = cash+net rcvbls+mkt scrts (or Quick Ratio) current liabilities
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Performance Measurement
Number of days = 365 In Inventory inventory turnover ratio
Total Asset = sales Turnover total assets
Working Capital = net sales Turnover average working capital
Current Ratio = current assets current liablilities
Acid Test = cash+net rcvbls+mkt scrts (or Quick Ratio) current liabilities
Inventory = Cost of Goods Sold Turnover Ratio average inventory Receivables = new credit sales Turnover Ratio avg accounts receivable Number of Days = 365 of Receivables receivables turnover ratio
Fixed Asset = net sales Turnover Ratio net fixed assets
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Performance Measurement
Number of days = 365 In Inventory inventory turnover ratio
Total Asset = sales Turnover total assets
Working Capital = net sales Turnover average working capital
Current Ratio = current assets current liablilities
Acid Test = cash+net rcvbls+mkt scrts (or Quick Ratio) current liabilities
Inventory = Cost of Goods Sold Turnover Ratio average inventory Receivables = new credit sales Turnover Ratio avg accounts receivable Number of Days = 365 of Receivables receivables turnover ratio
Fixed Asset = net sales Turnover Ratio net fixed assets
Debt-equity ratio = total liabilities fund balance Profit Margin = net income On Sales total assets Return on Assets = net income receivables turnover ratio
Equity ratio = fund balance total assets
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Performance Measurement
Inventory Accuracy
Fill Rate
Inventory Turnover Ratio
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Performance Measurement
Inventory Accuracy =
pre-count inventory – the sum of the variances* pre-count inventory
Note: the sum of the variances should be an absolute value
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Performance Measurement
Fill Rate =
number of units correctly filled number of units ordered
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Performance Measurement
Inventory Turnover Ratio (Turn Rate) =
Cost of Goods Sold average inventory
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( )
Performance Measurement
Inventory Turnover Ratio (Turn Rate) =
beg inv + purchases – returns – end inv beg inv + end inv
2
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Performance Measurement
Fill Rate vs. Turn Rate
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Performance Measurement
Customer Survey
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Inventory Obsolescence
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Inventory Obsolescence
•Minimize losses
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Inventory Obsolescence
•Minimize losses •Communicate with customers
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
•Surplus Property Program
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
•Surplus Property Program •Previously owned items at great prices
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
•Surplus Property Program •Previously owned items at great prices •Need their permission to dispose of property
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
•Surplus Property Program •Previously owned items at great prices •Need their permission to dispose of property •They can help you get the salvage value of the item
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Inventory Obsolescence
•Minimize losses •Communicate with customers •Rotate inventory •Monitor expiration dates •Monitor quantity levels
•Surplus Property Program •Previously owned items at great prices •Need their permission to dispose of property •They can help you get the salvage value of the item •GovDeals.com
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•Types of operations •Inventory systems •Inventory processes •Performance measurements •Obsolescence •Customers - The most important thing
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Questions?
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Audit
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Audit
•Inventory Observation
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Audit
•Inventory Observation •Management Assertions
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence •Completeness
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence •Completeness •Rights and Obligations
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence •Completeness •Rights and Obligations •Valuation or Allocations
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence •Completeness •Rights and Obligations •Valuation or Allocations •Presentation and Disclosure
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Audit
•Inventory Observation •Management Assertions
•Existence or Occurrence •Completeness
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Audit
•Existence or Occurrence
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Audit
•Existence or Occurrence Records Actual Goods
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Audit
•Existence or Occurrence Records Actual Goods
•Completeness
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Audit
•Existence or Occurrence Records Actual Goods
•Completeness Records Actual Goods
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Audit
•Existence or Occurrence Records Actual Goods
•Completeness Records Actual Goods
•High dollar items
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Audit
•Existence or Occurrence Records Actual Goods
•Completeness Records Actual Goods
•High dollar items •High volume items
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Questions?
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Resources
Aquilano, Nicholas J, & Chase, Richard B. Fundamentals of Operations Management. Homewood, IL, Irwin, 1991.
Baye, Michael R. Managerial Economics and Business Strategy. Chicago, Irwin, 1997. Brooks, Roger B., & Wilson, Larry W. Inventory Record Accuracy. New York, John
Wiley & Sons, Inc., 1995. Gianakis, Jerry & Matthews, Darin. Warehousing and Inventory Control. Herndon, VA:
NIGP, 2008. Gleim, Irvin N. & Flesher, Dale L., CMA Review. Gleim: Gainesville, FL 1994. Rayburn, L. Gayle. Principles of Cost Accounting, Using a Cost Management
Approach. Homewood, IL, Irwin, 1989. Robertson, Jack C. & Louwers, Timothy J. Auditing Ninth Edition. Boston: Irwin
McGraw-Hill, 1999. Wild, Tony. Best Practice in Inventory Management. New York, John Wiley & Sons,
Inc., 1997.