1. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 20-1

2. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-2 Chapter 20

3. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Excess inventory masks a host of other problems that a company may have  Reducing inventory exposes problems so that they can be solved  U.S. businesses incur $418 billion annually in inventory carrying costs  Taxes  Depreciation  Insurance  Obsolescence  Managing inventory efficiently can increase profitability 20-50% 20-3

4. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-4 Total U.S. Business Inventories, 1992-2013 ( in Billions of $)

5. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Steps to managing inventory effectively: 1.Develop an accurate sales forecast 2.Develop a plan to make inventory available when and where customers want it 3.Build relationships with quality suppliers 4.Set realistic inventory turnover objectives 20-5

6. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5.Compute the actual cost of carrying inventory 6.Use the most timely and accurate information system the business can afford to provide the facts and figures necessary to make critical inventory decisions 7.Teach employees how inventory control systems work so they can help manage inventory on a daily basis 20-6

7. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Pareto’s Law (or the 80/20 rule): About 80% of a firm’s sales are generated by about 20% of the items in its inventory  The goal of inventory control is to focus the majority of the effort on that 20% of the inventory 20-7

8. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Perpetual Inventory Systems  Perpetual inventory systems are designed to maintain a running count of the items in inventory  Point-of-sale (POS) systems  Can be set up for just $1,000  Accurate and current  Generate inventory reports  Visual inventory control systems  Most common inventory control system in a small business is the visual control system 20-8

9. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Partial Inventory Control Systems  Rely on the validity of Pareto’s Law  One of the most popular systems is the ABC system 20-9

10. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The ABC method of inventory control  Focuses inventory control efforts on the small percentage of items that account for the majority of a company’s sales  Categorizes inventory items into three classes: 1.A items: account for high dollar usage volume 2.B items: account for moderate dollar usage volume 3.C items: account for low dollar usage volume  Goal: establish different levels of control over each class 20-10

11. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Dollar usage volume: measures the relative importance of that item in a company’s inventory  Annual dollar usage volume: cost per unit x annual quantity used 1.A items: approximately the top 15% of items 2.B items: approximately the next 35% of items 3.C items: approximately the remaining 50% of items 20-11

12. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-12 ABC Inventory Control

13. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Classifying items allows the entrepreneur to establish the proper level of control  A items: strict control; perpetual inventory control systems  B items: moderate control; periodic control systems using EOQ and reorder point analysis  C items: minimal control; simple, inexpensive control systems such as the two-bin or tag system 20-13

14. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-14 The Two-Bin and Tag Systems of Inventory Control

15. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-15 ABC Inventory Control Features

16. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Perpetual Inventory Count  Regardless of the inventory control system used, a physical inventory count is still necessary  Two methods:  Periodic count  Cycle counting 20-16

17. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Radio Frequency Identification Tags  Many companies are replacing bar code systems with radio frequency identification (RFID): tags attached to individual items or to shipments that transmit data to a company’s inventory control system  Tiny microchip stores a unique electronic product code and a tiny antenna  Provides highly accurate, real-time information constantly and allow owners to locate and track an item at any point in the supply chain 20-17

18. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Just-in-Time Techniques  JIT attempts to reduce the investment required in inventory because it drains a company’s cash and hides a multitude of problems managers need to address  Goal:  JIT seeks to get items where they are needed “just in time”  Eliminate waste 20-18

19. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Benefits of JIT: 1.Lower investment in inventory 2.Reduced inventory carrying and handling costs 3.Reduced costs resulting from obsolete inventory 4.Lower investment in space for inventories and production 5.Reduced manufacturing costs as a result of improved coordination among departments 6.Higher inventory turnover ratios 20-19

20. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Successful JIT requires:  Mutual trust and teamwork  Empowerment  JIT works best in companies with:  Reliable deliveries of parts and supplies  Short distances between customers and vendors  Consistent quality of vendors’ products  Stable and predictable demand 20-20

21. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Just-in-time II techniques  Focus on creating a closer, more harmonious relationship with a company’s suppliers so that both benefit from increased efficiency  Empower the supplier within the customer’s organization  In a retail environment, JIT II principles are called efficient consumer response (ECR), which enable retailers to replenish their inventories constantly and on an as-needed basis 20-21

22. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The most common technique for liquidating slow moving merchandise is the markdown  Other techniques include:  Creating middle-of-the-aisle display islands that attract customer attention  Offering one-day-only sales  Giving quantity discounts for volume purchases 20-22

23. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Businesses worldwide lose 5% of their total sales, nearly $9.6 billion per day to criminals  Small businesses are more susceptible to crime than large companies  The biggest criminal threat to small businesses is employee theft 20-23

24. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Employee Theft  The greatest criminal threat to small businesses comes from inside  Dishonest employees steal 5.9 times more merchandise than do shoplifters  Average time required to catch an employee who is stealing: 18 months 20-24

25. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-25 Employee Theft Schemes in Small Businesses

26. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Employee theft:  Is more common in small companies, where control and security measures are less stringent  Is more pervasive than most owners think  How discovered? Employee tip! 20-26

27. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  What causes employee theft?  30% of workers pilfer small items and 60% will steal if given enough opportunity and motivation  Employees steal for four reasons 1.Need 2.Greed 3.Temptation 4.Opportunity 20-27

28. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Conditions that lead to major security gaps:  The trusted employee  Disgruntled employees  Organizational atmosphere  Physical breakdowns  Improper cash control 20-28

29. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Preventing employee theft  Screen employees carefully  Create an environment of honesty  Establish a system of internal controls  Use technology to control theft  Watch for signs of employee theft  Set up a hotline  Embrace a zero-tolerance policy 20-29

30. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-30 Behaviors Exhibited by Perpetrators of Employee Theft

31. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-31 Causes of Inventory Shrinkage

32. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Shoplifting  The most frequent business crimes  One out of 10 adults in the U.S. has shoplifted  Retailers lose $37.1 billion per year to shoplifters  The average U.S. household pays nearly $500 annually to cover merchants’ shoplifting losses 20-32

33. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Types of shoplifters  Juveniles  Impulse shoplifters  Shoplifters supporting other criminal behaviors  Kleptomaniacs  Professionals 20-33

34. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-34 How Professional Shoplifters Work

35. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Detecting shoplifters  Be especially vigilant on Saturdays or around holidays  Be wary of loud, disruptive groups  Look for nervous shoppers and ticket switchers 20-35

36. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Deterring shoplifters  Resources are best spent on prevention  Provide good customer service  Train employees to spot shoplifters  Pay attention to store layout  Use technology to deter and detect theft 20-36

37. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Apprehending shoplifters  Catching shoplifters is difficult  On average, caught just once every 48 times they steal  Turned over to the police just 50% of the time  Result: The chance that a shoplifter will actually go before a judge is just 1 in 100 20-37

38. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  To make shoplifting charges stick, a business owner must: 1.See the person take or conceal the merchandise 2.Identify the merchandise as belonging to the store 3.Testify that it was taken with the intent to steal 4.Prove that the merchandise was not paid for 20-38

39. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 20-39