lecture_4,5_w_c_mngt

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Working Capital Management

Inventory Management

Lecture no 4

1Jai Girraj


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Points to learn

1. Need for inventory

2. Order quantity

3. Order Point4. Inventory valuation

5. Monitoring and control of inventory

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Need for inventory

Process or movement inventory

If average output of a process is 500 units per

day and process time is 5 days, the average

process inventory is 2,500 units If average sales at warehouse are 100 units/

week, and it takes 3 weeks to ship goods from

plant to warehouse, then average movement

inventory is 100 * 3 = 300 units

3Jai Girraj


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Organisation inventory

Management of RM, In-process and

Finished goods inventory

Helps in planning and scheduling operations Decouple purchasing and production

Decoupling production and marketing

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Order quantity- EOQ Model

What should be the size of order?

Costs

Ordering cost, carrying cost and shortage cost Assumptions behind EOQ model

Forecast of requirement is known

Usage is even throughout he year

Orders can be placed immediately

Cost per order is constant regardless of size of order

Cost of carrying is fixed as percentage of inventory value

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EOQ Formula

TC =( U/ Q) * F + (Q/2) * P *C

WhereU is annual demand

Q is quantity ordered

F is cost per order

C is per cent carrying cost

P is price per unit

TC is total cost of ordering and carrying

TC will be least when

Q = (2 FU / PC) ^1/2

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Order Point

At what point order should be placed?

Points to consider

Usage

Safety stock

Lead time

Anticipated scarcity

Expected price change

Obsolescence risk

Government restrictions

Marketing considerations

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Inventory valuation

Basis

Cost basis

Market price Replacement cost

LIFO and FIFO

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Monitoring and control of

inventory ABC analysis

Selective approach to inventory control which calls for

greater concentration of efforts on high usage value

Just in time inventory control Opposite to Just in case

Developed by Taichi Okno of Japan

Conceptually appealing Calls for closeness of suppliers,good transport system,

better landing and storage facility

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Working Capital Management

Financing of Working Capital

Lecture no 5

10Jai Girraj


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Points to learn

Various sources of working capital

Convenience

Cost

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Sources

Accruals

Trade credit

Commercial Banks

Regulation of bank finance

Public deposits

Inter-corporate deposits

Short term loans from financial institutions

Rights issue

Commercial paper

Factoring

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Sources

Accruals

Salaries

Wages

Taxes

Trade credit

Obtaining trade credit

Liquidity

Track record Earnings record

Cultivating supplier relationship

Cost of trade credit

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Sources

Commercial banks

Application and processing

Sanction and terms and conditions

Forms of bank financing

Cash credit / Overdraft

Loans

Purchase / discount of bills

Letter of credit Pre and Post shipment credit

Security

Margin amount

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Sources

Regulation of bank finance

Norms for inventory and receivables

MP

BF Tandon Committee 0.75 ( ( CA CL)

0.75 ( CA) CL

0.75 ( CA CCA) CL

CAS / CMA

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Sources

Public deposits

Inter corporate deposits

Short term deposits from FIs

Rights/ Debenture issue

Commercial paper

Factoring

16Jai Girraj

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