Business Environment and Concepts

F.
5. Determining the optimum reorder point involves balancing inventory holding
costs against the stockout costs.
6. Materials requirements planning (MRP) is a computcri/ed system used to
manufacture goods based on demand forecasts. A key weakness of MRP is that it is a
"push through" system; products are manufactured based on the master schedule
whether they are needed are not. Therefore, if the forecasts are inaccurate of there are
production slowdowns, in- ^"• ventories will accumulate at various production stages.
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1. A Just-in-Time (JIT) purchasing system is a demand-pull inventory system
which involves the receipt of inventories just before they are needed for production.
For a JIT purchasing system to be effective, the company must select suppliers that
will deliver timely, defect-free products.
a. JIT may also be applied to production by establishing a system in which each
component is completed just before it is needed by the next production stage.
8. JIT advantages include
a. Lower investments in inventories and storage space
b. Lower inventory carrying and handling costs - '
c. Reduced risk of defective and obsolete inventory
d. Reduced manufacturing costs
e. Reduced number of high-quality suppliers
f. Allows the use of backflush costing, in which inventory costs are run directly
through cost of goods sold
9. Enterprise Resource Planning (ERP) systems are enterprise-wide computerized
information systems that connect all functional areas within an organization. ERP sys-
tems facilitate supply chain management by connecting the firm electronically to its
suppliers and customers.
Effective receivables management involves systems for deciding whether or not to
grant credit and for monitoring the receivables.
1. An overall measure of the accumulation of receivables is the days' sales
outstanding which is calculated as follows:
Days'sales outstanding - Receivables/Sales per day
2. A common management decision is whether or not to change their credit policy.
In making this decision management must consider the effect of the change on sales,
losses from uncollectible accounts, and accounts receivable holding costs.
PROBLEMS AND SOLUTIONS WORKING CAPITAL MANAGEMENT
Management should hold as much cash as possible to insure liquidity of the firm.
(True or
False?) ..'y^.vv, -v.y* r.V.Ws;.-; .'•••• , •-•.: >,•••,. -,-,.'-, - :.. V --, o, .--<•
Answer - A firm holds cash for two basic purposes: (I) transactions and b.
compensation to financial institutions. Cash does not produce income. Therefore, a
firm should hold only enough cash to a. take advantage of trade discounts, (2) assure
that the firm maintains its credit rating, (3) take advantage of favorable business
opportunities, and (4) meet emergencies. (False)
Working Capital Management - 25