MS: WORKING CAPITAL MANAGEMENT P2 ROS eu Production and Sale (Manufacturing) Management Techniques Definition: i orci Resale (Merchandising) Use (Services) 1. Sufficient Inventory 4. Physical Form (Tangible) 2. Minimizing the Cost of [2 Subject to Storage Inventory Characteristics: | 5" Subject to Obsolescence i. Carrying Cost 4, Subject to Stockout ii, Ordering Cost ili,_Stockout Cost 1. Statistical — EOQ/Reorder Point 2. Two-Bin System — one additional order to have one extra bin 3 ABC System — classify inventory into classes (fast moving/slow moving) 4, Red-line system — when red line has been reached: there's a need to reorder 5, Justn-Time 6. Order Cycling System — periodic count 7. Material Resource Planning (MRP) — automated system Economie Order | Optimum level of inventory to minimize cost Tiade-off Quantity (EOQ) —— ‘Qty=E0a C=0 | Lowest Cost > Sales/Deman 4. Constant > Carrying Cost eso ea a ‘Assumption (EOQ) > Ordering Cost aly Cost fo make a purchase order Condition 2. Storage Cost 3. Insurance Cost 4. Obsolescence Cost [Assumplion ofequaliy |_[“L_of Demand = ayia) |, canying Sales (S| y Order ‘Average || Cost(C) ‘ty (Q) Cost () | ¥ of Orders Inventory ( r + Safety Stock ee SO (itany) Foa= c> Point to reorder Reorder Point | > Level of inventory before another order is placed Reperoussion(Stockouts) Objective Prevent Stockouts > Lost sales (opportunity cost) Impact on regular customers I Delivery List |» NormalLead Time Usual Delivery Time (Lead Time Based) | , maximum Lead Time_Latest delivery Time > wio Safety Stock _ Usage x Normal Lead Time Reorder Point > w/ Safety Stock Usage x Max Lead Time > Normal Usi Usual Sales II, Usage Based aus e > Max Usage Maximum Sales > wio Safety Stock Normal Usage x Lead Time Reorder Point > w/ Safety Stock Maximum Usage x Lead Time > Probabilities of stockouts at various safety stock level Il Probabilistic | * i a Ese > Cost = Stockout + Carrying Cost © Choose the minimum operations) Eeicutenen due within a year ity risk" - technical insolvency (Asset > Liabilities; BUT Current Assets cannot support Objecti 1. Minimize the cost of financing (interest) 2. Manage favorable terms (delay required payments) 1. Accruals > Spontaneous > No interest costs 2. Trade Credit > Spontaneous (Accounts Payable) > Credit Purchases > Interest: Foregone Discounts ‘Types of STF 3.Notes Payable > Evidenced by Promissory Note (Face Value, Stated (Nominal) Rate, Due (Maturity) Date) > Special Terms: Discount, Compensating Balance 4, Receivable > Pledging Financing > Assignment > Factoring - sale of receivable © Cost of Factoring (Annual Rate, Factor Fee) | Cost = (ike) Notes Payable | Cost of Foregoing Discount Discount % 360 days* 700% - Discount % * “Payment Period — Discount Period “or 265 days Simple Interest > Interest are paid at maturity (in arrears) eter > Cost Interest + Face Value Discounted > Interest paid in advance (Prepaid Interest) Interest > Effective Rate = Interest + (Face Value — Interest) Compensating > Balance to compensate > Amount retained by the bank to compensate for potential default Balance Hi ckecouried General Formula: terest aida to encod Effective Rate = Net Interest + Net Proceeds ‘Add-on Loan > Effective Rate = Interest + Average Balance ‘Average Balance = (Face Value + Last Principal Payment) + 2