GLOBAL LOGISTICS GLOBAL LOGISTICS LECTURE 2: FINANCIAL IMPACT OF INVENTORY Agenda Agenda  1 Definition of Inventory  2 Types of Inventory  3 Positive financial impacts of Inventory  4 Negative financial impacts of Inventory  5 Inventory and Cash flow  6 Summary 1 Definition of Inventory 1 Definition of Inventory  Inventory can be defined as the amount of material which a company has in stock at a specific time.  In term of finance, Inventory can be defined as the total capital investment over all the materials stocked in the company at any specific time. 2 Type of Inventory 2 Type of Inventory Inventory can be in form of:  raw material inventory  in process inventory  finished goods inventory  spare parts inventory  tools and equipments  office stationary etc. 3 Positive financial impacts of 3 Positive financial impacts of inventory inventory  Inventory has many positive impacts in term of cost saving, sales support and effective operation:  Material available to meet future demand  To avoid Bullwhip effect: ◦ demand information is distorted as it moves away from the end-use customer ◦ higher safety stock inventories to are stored to compensate  Inventory provide an independence from vendors 3 Positive financial impacts of 3 Positive financial impacts of inventory inventory  Keep supply chain moves smoothly  Take advantage of discount as buying large amount of material  To reduce machine idle times by providing enough in-process inventories at appropriate locations  To reduce clerical cost associated with order preparation, order procurement 3 Positive financial impacts of 3 Positive financial impacts of inventory inventory  To reduce the material handling cost of semi- finished products by moving them in large quantities between operations.  Stability of Input cost  Take advantage of discount as buying large amount of material.  Take advantage of economy of scale in transportation 4 Negative financial impact of inventory 4 Negative financial impact of inventory Inventory cost in a business include:  Unit cost: it is usually the purchase price of the item under consideration. If unit cost is related with the purchase quantity, it is called as discount price.  Procurement costs: This includes the cost of order preparation, tender placement, cost of postages, telephone costs, receiving costs, set up cost etc. 4 Negative financial impact of inventory 4 Negative financial impact of inventory  Carrying costs: This represents the cost of maintaining inventories in the plant. It includes the cost of insurance, security, warehouse rent, taxes, interest on capital engaged, spoilage, breakage etc.  Stock-out costs: This represents the cost of loss of demand due to shortage in supplies. This includes cost of loss of profit, loss of customer, loss of goodwill, penalty etc. 4 Negative financial impact of inventory 4 Negative financial impact of inventory The total annual cost of inventory can be expressed as: Total annual inventory cost = Cost of items + Annual procurement cost + Annual carrying cost + Stock-out cost The objective is to minimize the total annual cost of inventory to maximize the annual profit ! [...]...5 Inventory and Cash flow    Cash flow refers to the movement of cash into or out of a business, a project, or a financial product It is usually measured during a specified period of time The flow of inventory and cash flow are interrelated Effective control of inventory can improve cash flow over a period of time 5 Inventory and Cash flow 6 Summary      Inventory is necessary... period of time 5 Inventory and Cash flow 6 Summary      Inventory is necessary for any company Inventory has both positive and negative impacts in term of finance Advantages of inventory can improve company’s financial situation Minimize the total annual cost of inventory to maximize annual profit Inventory flow and cash flow are interrelated . 2: FINANCIAL IMPACT OF INVENTORY Agenda Agenda  1 Definition of Inventory  2 Types of Inventory  3 Positive financial impacts of Inventory  4 Negative financial impacts of Inventory  5 Inventory. specific time. 2 Type of Inventory 2 Type of Inventory Inventory can be in form of:  raw material inventory  in process inventory  finished goods inventory  spare parts inventory  tools and. Summary 1 Definition of Inventory 1 Definition of Inventory  Inventory can be defined as the amount of material which a company has in stock at a specific time.  In term of finance, Inventory can be