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INVENTORY MANAGEMENT, LEAN AND FINANCE John Carrico.

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Presentation on theme: "INVENTORY MANAGEMENT, LEAN AND FINANCE John Carrico."— Presentation transcript:

1 INVENTORY MANAGEMENT, LEAN AND FINANCE John Carrico

2 What is inventory?  Inventory is anything that is purchased and held (stored) prior to use/need  product on-hand, current asset that has been acquired by cash (or payables) and is yet to be consumed

3 Inventory Distribution Management 3  Physical inventory is the actual counting of supplies and comparing the amount on hand with the amount on the financial statement  Inventory can be counted two ways:  Periodic counting  Done at regular intervals (usually 6 or 12 months)  Cycle counting  Continuously selecting subgroups to count  Typically 10% of stock per month  May be critical or volatile items

4 Inventory Distribution Management 4  Inventory control should:  Provide monetary savings  Improve service levels  Improve internal operations  Review supply utilization  Reduce waste  Fully utilize MMIS capabilities

5 Inventory Distribution Management 5  Inventory Valuation  Last in, First out (LIFO)  Cost is defined as the newest (most recently received) item is used to define product cost.  First in, First out (FIFO)  Cost is defined as the oldest item in the inventory (conservative, understates the inventory)  Average costing inventory  Method where a weighted average cost is computed. Your valuation methodology may be the source of your never being “right on” at inventory count time

6 Types of Inventory 6 Official- On the Hospital financial books as an ASSET. Perpetual Always reflects actual on-hand quantity- computer Periodic Periodically updated based on a count Unofficial- Already expensed. Consignment Housed in the facility, owned by the vendor, purchased when used. Is not included in inventory turn calculations.

7 Inventory Ground Rules 7  Impact of Consignment on our performance  Consignment stock is not counted as our inventory and is not included in turns.  The more items you consign, the higher your expected level of performance (turns) of your owned inventory.  However, while you do not retain ownership of the product, you are still responsible for the loss or damage-how many of you have letters of understanding with your vendors?

8 Managing Inventory 8  Why Manage Inventories? Reduce Costs-carrying costs Free Up Space Have Supplies Available

9 Managing Inventory 9 Controlling Inventory Techniques you can use to monitor and reduce inventories

10 Inventory Distribution Management 10  Successful Inventory Control is achieving balance between stock on-hand and organizational need  Basic components to assist inventory management are:  Order quantity  Lead time  Safety stock

11 “Normal” Departmental Inventory (% of total hospital supply inventory) 11 Note: All other individual departments are less than 5% of total supply inventory Source: VCS Supply Chain Database 6.3% 9% 12.3% 15.8% 23.8% 48%

12 Inventory Control Techniques 12 Inventory Turnover Rate Turnover = Total $ Issued Average Inventory Value (or ending value)

13 Inventory Control Techniques 13 Balance Order and Inventory Costs 15 – 18 Turns Higher Cost Lower Less Order Frequency More Order Cost Inventory Levels Sweet Spot

14 Inventory Management 14

15 Inventory Costs 15  Inventory Carrying Costs-what does it cost you to maintain your inventory? Opportunity Costs-Invested Capital-Cost of Money Cost of Space Handling Charges-labor expense Storage Costs Utilities/Insurance Data Processing Shrinkage Pilferage/theft Obsolescence Spoilage

16 Inventory Control Techniques 16 Setting Levels Reorder points Reorder quantities Min/Max Economic Order Quantity (EOQ)

17 Inventory Distribution Management 17  Supply level calculations  Maximum/minimum  Economic order quantity The greater the order quantity, larger the inventory. The longer the lead time, the greater the inventory. The higher the safety stock, the greater the inventory.

18 18  Order Cycle Period of time elapsed between determining need and receipt of goods. Usually expressed in days or weeks. Shows how many periods (days or weeks) of stock are generally on-hand and how often the item is being ordered. Lead Time Period of time between placing an order and receipt of goods. Terminology

19 19  Safety Stock A level or quantity of inventory on-hand to reduce the probability of a stock-out between time of order and time of receipt of stock (lead time). This is a level (usually less than the reorder point) that theoretically should never be needed or used. It is “insurance.” It increases the cost of inventory and that cost is weighed against the cost of a stock-out. Terminology

20 20  Economic Order Quantity Defined as a calculation of the most efficient maximum order quantities consider factors such as lead times, carrying costs, ordering costs and available space. A very basic EOQ formula follows: EOQ = square root of (2(F*S)/(C*P) F = fixed cost of placing and receiving an order S = annual usage C = carrying costs as a percentage of average inventory value P = purchase price per unit Terminology

21 Inventory Control Techniques 21 Maintain Accuracy Control access to your inventory Locator system/location checks Cycle counting First in First Out (FIFO) philosophy

22 Inventory Distribution Management 22  Fill-Rate - percentage of items successfully supplied to end user  Total Annual Stocking Cost (TASC)  TASC = Annual Ordering Costs (AOC) + Annual Carrying Costs (ACC) AOC = (D/Q)xS ACC= (Q/2)xC  D = Average Annual Demand  Q = Order Quantity  S = Fixed Order Cost  C = Carrying Cost per Unit

23 Inventory Distribution Management 23  Economic Order Quantity (EOQ)  D = Ave. Annual Demand  S = Fixed Order Cost  C = Annual Carrying Cost  Total Material Cost (TMC)  TMC = TASC + D(AC)  TASC = (D/Q)xS + (Q/C)xC  D = Average Annual Demand  AC = Acquisition Cost

24 Inventory Distribution Management 24  Safety Stock (SS)  Z = Service Factor  R = Average Replenishment Time  S = Average Daily Demand  σ r = Standard Deviation of Replenishment  σ s = Standard Deviation of Daily Demand  Order Point (OP)  OP = EDDLT + Safety Stock  EDDLT = Expected Demand During Lead Time EDDLT = R(S)  R = Average Replenishment Time  S = Average Daily Demand  OP = R(S) +

25 Integrated Enterprise Excellence Utilize “Lean Organization” and “Standardization” approaches focused on aggressively identifying and eliminating waste while achieving 5Rs (Right Product, Right Place, Right Quantity, Right Time, Right Price). Quality Service Cost – Increased Patient Satisfaction – Greater Value for the Community – Improved Competitiveness – Increased Employee/Physician Satisfaction Which results in Driving Enhanced Technology

26 Definition: A systematic approach to the identification and elimination of waste and non-value added activities through continuous improvement in all products and services Characteristics: Equipment used synchronously to demand Utilizes people to their fullest capacity Simple, flexible, visible, & responsive Requires constant change Creates products/services with minimum consumption of: -Capital investment -Floor space -Materials -Labor -Time -Distance Lean Organization

27 Definition of Waste Anything that doesn’t add value to the process Anything that doesn’t help create conformance to the customer’s specifications Anything your customer would be unwilling to pay (or need) you to do Understanding Waste Identification and elimination of waste is the central focus of a lean system. It is dependent on the understanding and involvement of all employees. Successful implementation requires all employees be trained to identify and eliminate waste from their work areas. Waste exists in all work.... and at all levels in the organization

28 8 Types of Waste  Transportation  Inventory  Movement  Waiting  Over Production  Over Processing  Defects  People skills/potential

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30 Lean Organization Small Lots Pull Systems Level Scheduling Supplier Development Lead Time Reduction Error Proofing Planned Maintenance Workplace Organization & Visual Controls Employee / Process Control Containerization/ packaging Quick Set-up Plant, Machine & Office Layout Transportation/ Logistics Reduction of Variation Machine Process Capability Standardized Operations Lean Tool Box

31 A Four Step Focus Step One - Understand what waste is Step Two - Use appropriate waste elimination tool to eliminate specific waste(s) identified Step Three - Brainstorm to develop a vision so as to create a plan Step Four - Aggressive implementation of plans. Do it now!!!! Lean Organization

32 Finance 3 Financial Statements  Income Statement  Cash Flow Statement  Balance Sheet

33 Income Statement  Displays revenues and expenses  Clearly states net profit or loss  Also called “statement of revenue and expense”

34 Sample Income Statement Sample Income Statement Sales Revenue $1,000,000 Cost of Goods Sold Direct Material($150,000) Direct Labor($100,000) Overhead($150,000) Total Cost of Goods Sold($400,000) Gross Profit$600,000 Operating Expense Office Supplies($50,000) Salaries($225,000) Utilities($25,000) Total Operating Expense($300,000) Net Income $300,000

35 Balance Sheet  Summarizes assets, liabilities, and shareholder equity or net assets (non-profit)  Assets = Liabilities + Shareholder Equity  Both sides of equation must “balance” out 

36 Balance Sheet 11/11/2011 ASSETS LIABILITIES Current Assets Current Liabilities Cash$62,950 Accounts payable$22,420 Accounts receivable60,880 Short-term notes1,800 (less doubtful accounts) Current portion of long-term notes6,000 Inventory62,150 Interest payable Temporary investment Taxes payable Prepaid expenses2,650 Accrued payroll1,140 Total Current Assets$188,630 Total Current Liabilities$31,360 Fixed Assets Long-term Liabilities Long-term investments Mortgage$30,000 Land Other long-term liabilities Buildings Total Long-Term Liabilities$30,000 (less accumulated depreciation) Plant and equipment150,000 (less accumulated depreciation)(56,870) Shareholders' Equity Furniture and fixtures15,570 Capital stock$110,000 (less accumulated depreciation)(4,720) Retained earnings121,250 Total Net Fixed Assets$103,980 Total Shareholders' Equity$231,250 TOTAL ASSETS$292,610 TOTAL LIABILITIES & EQUITY$292,610

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38 Cash Flow Statement  Records all cash movement  Inflows from operations and investments  Outflows for business expenses and investments 

39 Cash Flow Statement Beginning Cash Position$6,000,000 Cash Flow from Operating Activities Net Income$8,000,000 Depreciation Expense$4,000,000 Net Change in Accounts Receivable($2,000,000) Net Change in Account Payable$1,000,000 Total Adjustments to Operating Income$3,000,000 Net Cash Flow Provided by Operating Activities$11,000,000 Cash Flows from Investing Activities Purchase of New Computers($1,500,000) Purchase of Assembly Line Machines($2,000,000) Decommissioning Fund Contributions($500,000) Net Cash Used in Investing Activities($4,000,000) Net Cash Flows from Financing Activities Increase in Short Term Debt$500,000 Redemption of Long Term Debt($3,000,000) Issuance of Common Stock$250,000 Cash Dividends on Common Stock($2,000,000) Net Cash Provided by (Used in) Financing Activities($4,250,000) Net Increase / Decrease in Cash and Cash Equivalents$2,750,000 Cash and Cash Equivalents at the End of the Period$8,750,000


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