Finished Goods - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

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Types of Inventory

-^ Finished goods inventory^ –^ Items ready and available for sale^ –^ Permits prompt filling of orders^ –^ Large production runs create economies ofscale

Costs of an Inventory Policy • Ordering costs

:^ Cost of placing and receiving an order of goods • Carrying costs

:^ Cost of holding inventory

-^ Expressed as cost per unit per period –^ A percent of the inventory value per period • Stockout costs

: Incurred when a firm is unable to fill an order, resulting in:^ –^ Lost sales^ –^ Rescheduling production^ –^ Expediting special

orders

Inventory Control Models • ABC inventory classification – A^ – large dollar value items but comprise arelatively small percentage of the total number ofitems held in inventory.^ •^ Items may comprise 1- 10% of the number of itemscarried but be worth 80-90% of the total dollar valueof inventory. – B^ – items fall between items A & C – C^ – low dollar value items but comprise a largepercentage of the total items held • The firm will manage its inventory of A items much more closely than its inventory of C

Inventory Control Models • Economic Order Quantity (EOQ) model – EOQ is the order quantity (Q) that minimizes total costs. – Using the value of Q, the optimal length of oneinventory cycle (T) can be determined.*^ =

2SD Q C^

*Q * = (^) T ÷D 365

Q = Order quantityD = Demand for the itemS = Cost of placing and receiving an order (set-up cost)C = Annual cost of carrying one unit of item in inventory

Solution: EOQ^ (^

) (^

2SDQ* = C 2 $31.25= =

3, 600 $ 150 Conclusion: To minimize its inventory costs, Searsshould order 150 mattresses at a time.

EOQ: Graphical Solution

Q (Units)

Cost($)

TotalCost Q*

CarryingCost = CQ/2OrderingCost = DS/Q

Inventory Control Models • Just-In-Time Inventory Management System – Inventory supplied • At exactly the right time • In exactly the right quantities – Requires close coordination between • Company • Suppliers – Shorten the operating cycle – Reduce costs – Eliminate wasteful procedures

Major Points

-^ Current assets represent a major investmentfor many firms but they are often don’treceive the management attention theydeserve. •^ The job of the financial manager is to find theappropriate balance between minimizing riskand maximizing return. •^ No one method is “right” for all firms. Themethod chosen will depend on firm size,complexity and the options currently^ available to it.