Page 124 - DMGT525_MATERIALS_MANAGEMENT

Unit 8: Inventory Management

to 1997. However, every product or raw material was stocked in a warehouse. The company Notes
accumulated inventories of $1,775 million in the financial year 1995.
Inventory Management from 1998 to 2011

In 1998, Timothy D. Cook (Cook) joined Apple. He was in charge of Apple’s worldwide
operations. Jobs and Cook focused on reducing the inventories of the company. They
applied the strategy “slash inventory, shut warehouses, run manufacturing close to the
bone. This helped Apple get back on to the path of profit and set a new bar for the
electronic industry like competitors like Dell.” They closed down factories and warehouses
all over the world. They established relationships with contract manufacturers. They were
successful and the company generated a net profit of $309 million during the financial
year 1998.
Road Ahead

Cook developed a good ecosystem for the company’s business. He had gained good
experience in operational and inventory management. Under his leadership, Apple
developed an entire ecosystem of suppliers, who supported its business operations. The
company set itself the goal of obtaining stellar products and services within limited
timeframes, at a cost that represented “the best possible value” to both customers and
shareholders.
Questions

1. What are the strategies implemented by the Apple Inc to manage its inventory
effectively.
2. Critically analyze Apple’s strategy of working capital management.

Source: http://www.icmrindia.org/casestudies/catalogue/Finance/FINC079.htm

8.5 Summary

 The heart of inventory decisions lies in the identification of inventory costs and optimizing
the costs relative to the operations of the organization. Therefore, an analysis of inventory
is useful to determine the level of stocks.

 Carrying costs includes the costs for storage facilities, handling, insurance, pilferage,
breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.
 In the case of subassemblies, or finished products that may be produced in-house, ordering
cost is actually represented by the costs associated with changing over equipment from
producing one item to producing another. This is usually referred to as setup costs.

 The costs that are incurred as result of running out of stock are known as stock out or
shortage costs.

 The problem of ‘when to order’ is solved by fixing the appropriate re-order level of each
type of inventory. It is determined by compromising the cost of maintaining these stocks
and the disservice to the customer if this order is not delivered in time.

 A balance between when to order and how much to order is achieved by selecting the
right quantity for each order. This quantity in short is known as Economic Order Quantity
(EOQ).
 The EOQ refers to the optimal order size that will result in the lowest total of order and
carrying cost for an item of inventory given its expected usage, carrying cost and ordering
cost.

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