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_MGSC - 492 Exam 1 MGSC - 492 Exam 1 Questions and answers
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_MGSC - 492 Exam 1 MGSC - 492 Exam 1 Questions and answers
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MGSC - 492 Exam 1What is the lifeblood of the supply chain?
Inventory
What is the inventory turns formula?
the annual Cost of Goods Sold / the average annual inventory
Example of a company who has annual Cost of Goods Sold of $200,000 and the average
annual inventory has been $50,000.
Inventory turns would be 4 = $200,000 / $50,000
Example of inventory turns:
Management in the above example sets the inventory turns goal to 8. Currently they are at 4. If
cost of goods remain the same (same sales), $200,000, then theoretically, they should get by
with $25,000 annual inventory, $200,000 cost of goods sold / 8 inventory turns =$25,000
The savings the first year would be $25,000 = $50,000 - $25,000
What are the three major components of inventory carrying cost?
1) Capital Cost
2) Storage Cost
3) Risk Cost
What is Capital Cost?
When you purchase inventory you not only pay the price for the inventory and inspection cost,
but transportation and if overseas customers charges. This gets inventory on your books.
Capital cost is the cost of using your money and not getting a return. If you have money in
inventory and the going money rate is 6%, then the capital cost is 6% of the amount you have in
inventory. Another way of thinking about this is if you borrow funds and the rate is 6% interest
, and buy inventory with it, you will pay the bank 6% in interest over a period of time. So, it cost
you 6% interest to own the inventory.
What is Storage Cost?
The cost of the warehouse space, the cost of the warehouse labor, cycle counting, and any
equipment. This will increase as the amount of inventory increases.
What is Risk Cost?
When inventory is stored it is at risk. It can become damaged - there can be accidents in the
distribution center that makes the inventory no longer usable (a fork truck crushes a box of small
copper parts), it can be pilfered (stolen), it can become obsolete, etc.
Inventory Carrying Costs Example
From our accountants we are told the inventory carrying cost in this company is 30% and this
cost is annual (every year).
Before the improvement the average annual inventory was $50,000, then the cost of carrying
the inventory every year was $50,000 * 30% = $15,000.
But since the inventory was reduced to $25,000, the inventory carrying cost is $25,000 * 30% =
$7,500.
So, the difference is $7,500 = $15,000 - $7,500. So, with the new reduction in inventory, the
company is saving $7,500 each year that they do not have to pay in interest, storage cost, and
risk cost that are written off.
Days of Supply Example
There are 600 pieces on hand with an average daily usage of 30. The days of supply for this
part is 600/30 = 20 days. So, in 20 days, the part should run out.
ABC analysis
20% of the parts will contribute to 80% of the inventory value
ABC Analysis Example
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