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MNP2601 CHAP9
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CHAPTER 9
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CHAPTER 9 – QUALITY AND INVENTORY MANAGEMENTLearning outcome 1 – Explain the need for the firms to hold various kinds of
inventory – Pg. Ref. 153
1. Continuity in production and marketing – sufficient inventory ensures
that production is continuous. Low unit costs and constant availability of
final products provide marketing opportunities such as timeous
availability and better service to customers which could result in a better
competitive position.
2. Cost savings and hedging against price uncertainties – The enterprise
may make use of quantity discounts and transport in bulk, which means
cost savings. Hedging against price in important to enterprise prone to
currency volatility.
3. Protection against supply uncertainties – It serves as protection against
breaks in supply caused by unexpected events, such as strikes and
natural disasters.
4. Purchasing costs – Larger less-frequent deliveries must be traded off
against the increased cost of inventory holding and decreased costs of
transportation. ??
Learning outcome 2 – Illustrate the importance of inventory on the return on
investment (ROI ) of business enterprises Pg Ref. 154
1. It is generally accepted that inventory represents on average about 20%
of total assets and inventory holding costs
2. Represent on average about 20% of the amount invested in inventory.
Assuming that an enterprise has assets of R 1 million, the following
conclusions may be drawn:
Total assets: R1 000 000
Investment in holding: R200 000 (20% of total assets)
Inventory-holding costs: R40 000 (20% of
Inventory investment)
Assumed income of enterprise: R100 000
Return on investment: 10%
Assume better inventory: 20% reduction in inventory
Management
, Total assets will then be: R960 000 (R1mil – 20% of
R200 000)
Inventory holding costs are: R32 000 (20% of R180 000)
Then
Income (profit) of the: R108 000 (R 100 000 + R 8 000
(R 40 000 - R 32 000)
Enterprise
Return on investment: 11.25%
Learning outcome 3 – Explain the importance of the different cost elements
of inventory holding in the decision to buy the right quantity Pg. Ref. 155
1. The cost of financing the inventory - by means of interest paid on
borrowed capital or interest lost on equity
2. The cost of storage – costs of having a warehouse, for example
maintenance costs or property tax
3. Cost of handling inventory – such as equipment or remuneration of
personnel
4. Insurance cost – to reduce the risk of loss due to damage or theft
5. Technical and depreciation of inventory cost – when product are
perishable or become obsolete, it will cause inventory losses ( costs)
Learning outcome 4 – Perform in practice a Pareto analysis (ABC analysis) of a
firm’s total inventory pg. ref. 158 – 159
- aimed at providing management with info on the importance of
different inventory items ito monetary value
- can only be done after a thorough investigation of all items in the
inventory catalogue looking at variables like usage patterns, price
variations and stability, supplier lead times, particular unique
characteristics of inventory items
- inventory management may use it to plan inventory selectively and to
set up purchasing priorities
- ABC analysis (def): expressing the rand demand and te quantity of
inventory items in a category as a % of the total rand demand (per
period of time) and total number of items in the inventory respectively
- From this 3 categories of items can be identified:
(1) Class A – represent approx. 10% of total number of items, but 70% of
rand value [careful control to be exercised over class A items as they
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