A Report on Inventory Management
“Scientific Glass - Inventory Management” study case
1. How much funding will have to be raised in 2010 in order to finance the increase in inventory?
Generally, the budget of inventory has positive correlation with the forecast of the turnover. As the case concerns, the finance department forecast 20% growth in sales in 2010 due to a forecast cast increase in the number of orders. Consequently, the cost of finished goods inventory in 2010 should get 20% increase on the basis of inventory cost in 2009. Moreover, the increase rate of raw material inventory should be more than 20%, thus, we assume it at 25%.
Furthermore, the cost of adding one distributor is $750,000, so the total cost of three distributors is $2.25MM. All in all, the inventory budget in 2010 should be:
2.18*(1+25%)+6.54*(1+20%)+2.25=$12.82MM
2. Analyze the inventory value and cost impact of the different options proposed by Eric, Melissa, and Ava:
The results of our calculations applicable for this question are included in the Exhibit of the report.
a) Implementation of the Policy Changes (reducing inventory of overstocked products, eliminating trunk stock, and reducing inventory write-offs)
For the calculation of the effect of implementing the policy changes, we assumed that the enforcement of the 99% service level through reduction of inventory of overstocked products would affect inventory of all finished goods and subsequently the inventory of raw materials needed to produce finished goods by the given 5%. The inventory needed for the three new distributors would not be affected, however, as it is stated in the case, this amount is needed to ensure distributors effectively push product sales. Furthermore, we assumed that the 32 sales employees made use of the highest possible amount of trunk stock ($10,000 each) to realize as many sales as possible.
For the implementation of the policy changes in total the reduction of inventory value amounts to $372,320, the reduction in inventory costs
1. How much funding will have to be raised in 2010 in order to finance the increase in inventory?
Generally, the budget of inventory has positive correlation with the forecast of the turnover. As the case concerns, the finance department forecast 20% growth in sales in 2010 due to a forecast cast increase in the number of orders. Consequently, the cost of finished goods inventory in 2010 should get 20% increase on the basis of inventory cost in 2009. Moreover, the increase rate of raw material inventory should be more than 20%, thus, we assume it at 25%.
Furthermore, the cost of adding one distributor is $750,000, so the total cost of three distributors is $2.25MM. All in all, the inventory budget in 2010 should be:
2.18*(1+25%)+6.54*(1+20%)+2.25=$12.82MM
2. Analyze the inventory value and cost impact of the different options proposed by Eric, Melissa, and Ava:
The results of our calculations applicable for this question are included in the Exhibit of the report.
a) Implementation of the Policy Changes (reducing inventory of overstocked products, eliminating trunk stock, and reducing inventory write-offs)
For the calculation of the effect of implementing the policy changes, we assumed that the enforcement of the 99% service level through reduction of inventory of overstocked products would affect inventory of all finished goods and subsequently the inventory of raw materials needed to produce finished goods by the given 5%. The inventory needed for the three new distributors would not be affected, however, as it is stated in the case, this amount is needed to ensure distributors effectively push product sales. Furthermore, we assumed that the 32 sales employees made use of the highest possible amount of trunk stock ($10,000 each) to realize as many sales as possible.
For the implementation of the policy changes in total the reduction of inventory value amounts to $372,320, the reduction in inventory costs