Page 209 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes present value factors for inventory costs, Q × I are functions of the quantity order, Q, which
determines the timing of the purchases.
The traditional EOQ model is insensitive to the impact on present value cost of the changes in
the timing of cash flows resulting from different order quantities and different payment terms.
In other words, if one supplier offered a combination of quantity discounts and payment terms
different from another supplier. The EOQ model would not be able to adequately assess the
differences between the present value costs of the two options. Only the present value timeline
approach can accurately gauge the true present value cost differences between alternative
inventory ordering plans.

Self Assessment

Fill in the blanks:

11. ....................... can be defined as a line or chart showing a company’s cash inflows and cash
outflows and the business activities that caused them over a given period of time.
12. The complexity of any inventory management system is directly proportional to the
number of items carried in stock and the number of ....................... transactions necessary to
keep track of material movement and disposition.
13. In HML classification, the ....................... value of the item is considered.
14. ....................... is carried forward at the end of each year at the original price paid when the
business commenced to operate.
15. The traditional EOQ model is ....................... to the impact on present value cost of the
changes in the timing of cash flows resulting from different order quantities and different
payment terms.

12.5 Summary

Inventory management is concerned with keeping enough product on hand to avoid
running out while at the same time maintaining a small enough inventory balance to
allow for a reasonable return on investment.

A major problem with managing inventory is that the demand for a corporation’s product
is to a degree uncertain.
The supply of the raw materials used in its production process is also somewhat uncertain.

Carrying costs constitute all the costs of holding items in inventory for a given period of time.
They are expressed either in rupees per unit per period or as a percentage of the value per
period.

ABC inventory classification and related control techniques were developed originally
for mutual systems prior to the widespread use of automated inventory record keeping.
ABC control placed emphasis on reducing record-keeping requirements, redirecting clerical
and review effort, and implementing stratified or varying inventory control techniques.
These concepts also are generally applicable to automated systems.
Value-volume Analysis is an important concept, because those items with a high level of
activity must be more closely controlled than the ones with relatively low activity levels.
The VED (Vital, Essential, Desirable) classification is applicable largely to spare parts.

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