Managing Purchasing and Inventory, Ch #15

Terms Ch#15 Purchasing Financing Cost Model Inventory Opportunity Cost Vendors Storage Cost Trade Discount Insurance Cost Quantity Discount Shrinkage Cost Cash Discount Obsolescence Cost Secured Funds Warehousing Invoice Lead Time Usage Rate Safety Stock JIT Turnover rate Inventory Costs COGS

Keeping an inventory can be expensive The cost of keeping an inventory is broken into 6 costs. (Financing, Opportunity, Storage, Insurance, Shrinkage and Obsolescence)

Shrinkage costs could be: Theft, breakage, damage, spoiled,cashier errors or bookkeeping errors. Shrink is missing product. If you know how it came to be missing, it is no longer shrink.

Obsolescence Costs This is the money lost when products are ” falling into disuse or becoming out of date” while in inventory.

Opportunity Costs The expenses associated with giving up the use of money tied up in an inventory

Insurance Costs are Expenses associated with insuring an inventory.

Financing Costs Are the expenses associated with borrowing money to buy inventory.

Secured Funds Most vendors want secured funds payment before sending the product Examples of this is: Cashier checks, credit cards or wire transfers

Storage Costs are Are the expenses associated with warehousing products

Warehousing Always costs money. Therefore, you should try to never keep an inventory

Model Inventory Is what you think you will need to purchase and warehouse

Safety Stock The least amount of inventory “that keeps you from running out of stock”. “It is the cushion of products that prevents a business from running out of inventory”.

Purchasing (Procurement) is the act of buying Products from vendors for an inventory. Large businesses use the purchasing departments to buy products and materials.

Vendors are sales organizations that sell Products and material to businesses

An Invoice is The bill that states when and what products were purchased

Lead-time is the time it takes From after having placed an order, to receiving the product.

When purchasing an inventory There are: Trade discounts, Cash discounts & Quantity (Volume) discounts

Cash discounts Are reduced from a purchase if payment is received by a specific date

Trade discounts Are the monies reduced from a purchase as a reward to continue to do business with a vendor

Quantity (Volume) Discounts are A reduction of cost to a purchaser for buying large orders from a vendor.

JIT is Just-In-Time An inventory control system that ships (delivers) product at the time it is needed, reducing inventory costs

Usage Rate is The quantity of products used over time, to produce products. Usually in a manufacturing process.

COGS Is the Cost Of Goods Sold. All inventory accounting is valued at the cost, price for which it was purchased.

Turnover rate How often a business sells out of a product. (Used in ordering)

Equation for Turnover Rate Inventory Turnover = COGS / Average Dollar Value of the Inventory