Introduction to Inventory Management - Part 1
Summary
TLDRThe video discusses the importance of inventory management in financial management, emphasizing its role in converting resources into revenue. It outlines different types of inventory, such as raw materials, work-in-progress, and finished goods, while highlighting the costs associated with maintaining inventory, including purchase, ordering, holding, and shortage costs. The video also touches on the need to manage inventories effectively to meet demand, prevent losses, and stay competitive in the market. The speaker explains independent and dependent demand in relation to inventory management, offering insights into cost-saving strategies.
Takeaways
- 📦 Inventory management is crucial in financial management because it helps convert resources into cash, although it is not easily converted into quick cash.
- 🔄 Inventory is considered a physical resource that can be sold or transformed into a more valuable state, making it an essential asset.
- 🏭 Types of inventories include raw materials, purchased parts, finished goods, work-in-progress items, and tools, often seen in manufacturing setups.
- ⏳ Managing inventory involves determining how many units to order and when to order, considering associated costs and timing.
- 🎯 The main reasons for keeping inventories are to stabilize production, take advantage of price discounts, meet demand, prevent loss of orders, and stay competitive.
- 📈 Independent demand refers to finished goods, while dependent demand relates to parts needed to produce other products.
- ⚙️ Inventory control ensures that the right quantities of good quality items are available when needed in different departments.
- 💸 Inventory costs include purchase costs, ordering costs, holding (carrying) costs, and shortage costs, all of which need to be managed.
- 🚚 Purchase cost covers the expenses of acquiring and moving inventory through the logistics system, including transportation.
- 🏬 Holding cost involves storage, service, risk, and capital costs, while shortage cost arises when there isn't enough inventory, leading to potential business losses.
Q & A
Why is inventory management important in financial management?
-Inventory management is crucial because it directly impacts a company's liquidity and operational efficiency. Managing inventory ensures that businesses can convert physical resources into cash while minimizing costs and meeting customer demand.
What is the difference between current ratio and quick ratio in the context of inventory?
-The current ratio includes inventory because it is part of current assets, but the quick ratio excludes inventory since it is not easily converted into cash without significant effort.
What are the main types of inventories mentioned in the transcript?
-The main types of inventories are raw materials, purchased parts and supplies, finished goods, work in process (partially completed products), and tools and equipment.
What is meant by 'work in process' inventory?
-'Work in process' refers to partially completed products that are in the production stages but not yet finished goods ready for sale.
What are the reasons for keeping inventory?
-Inventory is maintained to stabilize production, take advantage of price discounts, meet demand during replenishment periods, prevent loss of orders, and keep up with changing market conditions.
What is the difference between independent demand and dependent demand?
-Independent demand refers to finished goods like computers that can be sold directly. Dependent demand refers to components or raw materials required to make other products, such as the motherboard in a computer.
What are the key functions of inventory in a business?
-The functions of inventory include meeting anticipated demand, smoothing production requirements, decoupling operations, protecting against stock-outs, taking advantage of order cycles and quantity discounts, and hedging against price increases.
What are the four main categories of inventory costs?
-The four main categories of inventory costs are purchase costs, ordering costs, holding (or carrying) costs, and shortage costs.
What does 'holding cost' entail?
-Holding cost includes the expenses associated with storing inventory, such as storage fees, insurance, and the risk of deterioration. It also includes the cost of capital tied up in the inventory.
What is 'shortage cost' and when does it occur?
-Shortage cost arises when there is insufficient inventory to meet demand, leading to additional expenses like urgent material purchases, premium transportation charges, or loss of business due to stock-outs.
Outlines
📚 Introduction to Inventory Management
The speaker begins by introducing the topic of inventory management, emphasizing its importance in financial management. Inventory is defined as a physical resource held with the intention of selling or transforming it into something more valuable. The discussion covers the types of inventory, including raw materials, work in progress, finished goods, and tools and equipment. The purpose of inventory management is highlighted, focusing on the cost associated with determining the number of units to order and when to order. The speaker also explains the concept of inventory in relation to the current ratio and quick ratio, noting that inventory is harder to convert into cash compared to other assets. Reasons for maintaining inventory are provided, such as stabilizing production, taking advantage of price discounts, meeting demand, preventing loss of orders, and keeping pace with market conditions.
🔍 Understanding Demand and Inventory Functions
The second paragraph delves into the concept of demand and its forms, independent and dependent. Independent demand refers to items like finished goods that are sold directly to consumers, while dependent demand relates to items that are components of a larger product. The speaker discusses the functions of inventory within the supply chain, such as meeting anticipated demand, smoothing production requirements, and decoupling operations. The paragraph also introduces the costs associated with inventory management, including purchase cost, ordering cost, holding cost, and shortage cost. Each cost type is briefly explained, providing insight into the financial considerations involved in maintaining inventory levels.
💼 Inventory Costs and Management Strategies
In the final paragraph, the focus shifts to the costs incurred in inventory management. The speaker outlines the different types of costs, such as ordering costs (which include stationary and clerical expenses), holding costs (associated with storage, insurance, and deterioration), and stock out costs (resulting from urgent purchases and labor hour losses). The paragraph also touches on inventory management techniques, particularly manufacturing setups, and mentions that the discussion will continue in the next video. The speaker emphasizes the importance of managing these costs to maintain an efficient inventory system.
Mindmap
Keywords
💡Inventory
💡Current Ratio
💡Quick Ratio
💡Raw Materials
💡Finished Goods
💡Work in Process (WIP)
💡Ordering Cost
💡Holding Cost
💡Stockout Cost
💡Dependent Demand
Highlights
Inventory management is crucial in financial management because converting inventory into cash requires effort, making it part of the current ratio but not the quick ratio.
Inventory is a physical resource a firm holds with the intent to sell or transform into a more valuable state.
Inventory management involves determining how many units to order and when to order, considering cost factors and time value of money.
There are different types of inventory: raw materials, purchased parts, supplies, finished goods, work in process, and tools and equipment.
Raw materials are components entering the production process to form a product, while work-in-process refers to partially completed products.
Finished goods are the final products ready for sale, classified as movement, lot-size, anticipation, or fluctuation inventories.
Reasons for keeping inventory include stabilizing production, taking advantage of price discounts, meeting demand during replenishment, and adapting to changing market conditions.
Inventory control aims at tracking inventory to ensure good quality and appropriate quantities are available to different departments when needed.
There are two forms of demand: independent demand (finished products like computers) and dependent demand (components needed to assemble a final product).
Inventory functions within the supply chain, such as meeting anticipated demand, smoothing production, decoupling operations, and hedging against price increases.
Key inventory costs include purchase cost, ordering cost, holding cost, and shortage cost, each contributing to overall management and decision-making.
Purchase cost refers to the price of acquiring and moving an item through the logistics system, while ordering cost pertains to replenishing inventory and setting up shipment.
Holding cost involves expenses related to storing inventory, including storage space, insurance, and deterioration risks.
Shortage cost arises when there is insufficient inventory at the right place and time, potentially leading to additional expenses and lost business opportunities.
Effective inventory management helps avoid stock-out costs, ensuring production runs smoothly and the business can take advantage of quantity discounts.
Transcripts
Okay good morning everyone Uh today we
will be Uh discussing inventory or
inventories management So why important
in financial management to consider
inventory managements ' ba ang inventory
according to its description by the book
um it is hard to convert it into cash
kaya kasama siya sa current ratio kasi
ito yung isa sa mga kailangan mong
effortan to convert it to cash kaha
hindi siya kasama sa quick ratio o quick
ah quick cash computation kasi nga um
You have to exert effort to convert it
into cash or it is not easily converted
within the year or converted into cash
so inventory management is a physical
Resource that a firm holds in stock with
the intent of selling it or transforming
it into a more valuable state so the
purpose of studying inventory management
since It is a cost There's a cost
Association on this one we have to
determine How many units to order and
when to order discount buse everything
that is associated with time equivalence
to money right so Especially that this
inventory is an asset that could be
transform into a more valuable state or
It Could Be An addition on how we
convert it into our Uh cash or Revenue
so the types of inventories are raw
materials purchase parts on supplies
finish goods work in process This is
partially completed products items being
transported and tools and equipment so
These are the things that normally can
be seen in a manufacturing setup or
business so raw materials meaning ito
yung mga mga kay kailangan na materials
enable for you to form a product so
purchase parts and supplies this Could
Be An indirect supplies that could help
you to form that product finish product
is the end result of your um process or
production so work in work in process is
Actually consider the partial completed
products and logistics and tools and
equipments are these are the necessary
things that are um in Identifying
inventories in the in the business so to
make it more defined raw material
inventory says that
Uh
Okay raw materials
are parts of components which is enter
into the production or into product
during the production process and
general form a product so work in
process inventories These are the Sen
finish products This is also known as
the work in progress products or finish
Work in Progress partly finish products
that are form during the stages of
production so mro is the maintenance
repairs and operating these are consumed
during the production process so
finished inventories these are the
finished products that are ready for
sales so they can classified as the
movement inventories lat size
inventories anticipation inventories of
fluctuation inventories so these are Uh
the synonymous to finish products or
finish
inventories so reason for keeping
inventories is to stabilize production
to Take advantage of the price discounts
to meet the demand during the replenish
period to prevent loss of orders and to
keep pace with changing market condition
so These are the reasons why we have to
keep up in maintaining our inventories
or how we manage our inventory Syempre
for example pupunta ka ng Jollibee
nakita mong out of stock Syempre on the
perspective of the customer medyo
madi-disappoint tayo tendency is There's
a probability that the customer may
switch to
another product or brand So this will
affect the Revenue of the business and
then to keep up with the competition the
king market competition Syempre You have
to be as much as possible one of the
businesses that could keep up with the
demands in the market so These are the
few reasonings why we have to keep our
inventories so our objective here is to
have an inventory control that aims at
tracking of our inventories so in other
words inventories of good quality and
right quantities should be available to
a different departments as when they are
needed so there are two forms of demand
so since we mention that we have to keep
up with the changing demand or market
condition so there are two forms of
demand so one is independent demand
which is the rate of use for an item
that does not relate directly to the use
of another for example finished goods
such as computer
controlling can take place by means of
an order point so when we say dependent
demand is those which is linked to
another demand for example yyung sub
assembles which go into higher level of
components of finish item such as
motherboard for A Computer so
independent is enable for you to form
another product you be needing other
parts of sub other materials enable for
you to come up or for
product yung independent kasi is
normally finish product already such as
computer house so in terms of house as
an example yung house kailangan mo pa ng
raw materials labor inable for you to
build your house um that is considered
dependent demand so when you already
selling house therefore that is
considered independent demand because
you have already available sale or
product to it to the market so the
functions of inventory is of course as
part of the the supply chain demand so
supply process products so of course in
the supply process there is a demand
inventory and then demand process which
Actually when you convert inventory into
a product there's certain demand in the
market that needs to be addressed or
needs to be
provided So you have to to meet
anticipated demand to smoothen
production requirements and to decouple
operations meaning if there are certain
operation that needs to be decoupled or
meaning hindi na necessary therefore
that could another way of us of saving
cost in the
business so to protect against stock
outs to to Take advantage of Order cycle
and to help hedge against price increase
and to permit operation to Take
advantage of quantity discount and these
are the functions of how you maintain or
how we manage our
inventories so let's go to inventories
cost so we have purchase cost ordering
cost holding cost and forage cost so
These are the cost that we I have to
identify In order for us to maintain or
manage our inventories So um for this
one
Uh for is cost is Actually Uh a unit
price that frames space to its inventory
So it is Actually as the the the product
moves in the logistics system the
purchase cost is Actually the analysis
of how the product is fully landed and
how it is being determined through cost
so it's meant to acquire and moves the
item to the point in the system it is
the movement Actually so when you move
to another place or you transport your
your product to another place that is
the logistics cost or purchase cost so
the ordering cost
um Actually it is the reorder or
replenish of the inventory So if we
produce items internally then There Will
Be an organization setup cost so when
you are preparing for a movement or
shipping of course There's a Uh
transportation or an ordering cost that
needs to be set up so it actually
happens because
to cover all the expenses or the cost
when you are Preparing or setting up a
product So this C involves with
processing the order involving the ping
the pel auditing and so forth holding
cost is more on the storage service cost
and risk cost capital cost These are the
cost that may incur overtime so sure
there are cost associated And this one
so the characteristic of holding cost
varies with the amount of inventory
being held at the time that is being
store in a certain location or an
inventory So it includes the storage
cost service cost risk cost and capital
cost so We also have shortage cost or in
the demand rises so there is also an
anticipation of projection for the
sorted cost because um the shortage cost
Actually pertains If there is certain Uh
shortage in the inventory and not having
enough inventory at the right place at
the right time may inure additional cost
for you to purchase materials that are
necessary for your production of the
goods that you will be selling to the
market so we have ordering cost
stationary clerical so These are the
categories or types of cost under
ordering cost so holding cost This is or
carrying cost storage the insurance
deterioration So this all are Actually
anticipated or projected within you know
selling a a a product so stock of cost
It is a loss of business profit it is an
additional expen due to urgency of
purchase like telegraph telephone
purchase at premium transport charges
loss of labor hours so due to stock out
cost so in inventory there are Sur
techniques in how they maintain
inventory in terms of a manufacturing
setup but again We will be focusing in
this four particular strategies and how
maintain inventory management So I'll
keep a pause and then continue it on to
the next
video n
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