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Financial Impact of
Inventory
Selected Financial Data for Manufacturers, Wholesalers, and 5-2
Retailers for 1997 ($Millions)
Companies Sales Net Profits Net Profits as a Total Assets Inventory Investment Inventories as a
Percent of Sales Percent of Assets
Manufacturers
Abbott Laboratories $11,883 $2,094 18% $12,061 $1,280 11%
Borden, Inc. 1,488 221 15% 2,206 302 14%
The Clorox Company 2,741 298 11% 3,030 212 7%
Dresser Industries, Inc. 7,458 318 4% 5,099 972 19%
Ford Motor Company 153,627 6,920 5% 279,097 5,468 2%
General Electric Company 90,840 8,203 9% 304,012 5,895 2%
General Mills 6,033 422 7% 3,861 389 10%
Goodyear Tire & Rubber Co. 13,065 559 4% 9,917 1,835 19%
Harris Corp. 3,939 133 3% 3,784 604 16%
Honeywell Co. 8,028 471 6% 6,411 1,028 16%
NCR Corp. 6,598 7 0.11% 5,293 489 9%
Newell Co. 3,234 290 9% 3,944 625 16%
Pfizer, Inc. 12,188 2,213 18% 15,336 1,773 12%
Sara Lee Corp. 20,011 (523) -3% 10,989 2,882 26%
Xerox Corp. 18,166 1,452 8% 27,732 2,792 10%
Wholesalers and Retailers
Baxter International 6,138 300 5% 8,707 1,208 14%
Bergen Brunswig Corp. 11,661 82 1% 2,707 1,309 48%
Dayton Hudson Corp. 27,757 751 3% 14,191 3,251 23%
Fleming Companies, Inc. 15,372 25 0.16% 3,924 1,019 26%
Kmart Corporation 32,183 249 1% 13,558 6,367 47%
Nordstrom 4,852 186 4% 2,865 826 29%
Sears, Roebuck & Company 41,296 1,188 3% 38,700 5,044 13%
Supervalu Inc. 17,201 231 1% 4,093 1,116 27%
Wal-Mart Stores, Inc. 117,958 3,526 3% 45,384 16,497 36%
Winn-Dixie 13,219 204 2% 2,921 1,249 43%
Note: Ending inventory figures are used for inventory investment. All figures are for 1997.
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Trade-offs in 5-3
MARKETING
Order processing
Price and information
costs
Place/customer
service levels
Inventory
LOGISTICS
Transportation
carrying costs
costs
Carrying Costs
• Capital
• Inventory service
• Storage space
• Inventory risk
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Positions in the 5-5
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Normative Model of Inventory 5-6
Inventory Insurance
service
costs Taxes
Obsolescence
Inventory Damage
risk costs
Pilferage
Relocation costs
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Adjusting the Cost of Money to Fit the 5-7
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5-8
Summary of Data Collection Procedure
Step
No Cost Category Source Explanation Amount (Current Study)
1. Cost of Money Comptroller This represents the cost of having money invested 30% pretax
in inventory and the return should be comparable to
other investment opportunities.
2. Average 1. Standard cost data -- comptroller's Only want variable costs since fixed costs go on $7,800,000 valued at variable cost
monthly department regardless of the amount of product manufactured delivered to the D.C. (Variable
inventory valued 2. Freight rates and product specs are and stored -- follow steps outlined in body of report. manufactured cost equaled 70% of
at variable costs from distribution reports full manufactured cost. Variable
delivered to the 3. Average monthly inventory in cases cost FOB the DC averaged 78% of
distribution from printout received from sales full manufactured cost)
center forecasting
3. Taxes The comptroller's department Personal property taxes paid on inventory $90,948 which equals 1.17%
4. Insurance The comptroller's department Insurance rate/$100 of inventory (at variable costs) $4,524 which equals 0.06%
5. Recurring Distribution operations This represents the portion of warehousing costs $226,654 annually which equals
storage (public that are related to the volume of inventory stored. 2.89%
warehouse)
6. Variable storage Transportation services Only those costs that are variable with the amount Nil
(plant of inventory stored should be included.
warehouses)
7. Obsolescence Distribution department reports Cost of holding product inventory beyond its useful 0.80% of inventory
life
8. Shrinkage Distribution department reports Requires managerial judgment to determine the
portion attributable to inventory storage. $100,308 which equals 1.29%
9. Damage Distribution department reports Requires managerial judgment to determine the
portion attributable to inventory storage.
10. Relocation costs Not available Only relocation costs incurred to avoid Not available
obsolescence should be included.
11. Total carrying Calculate the numbers generated in steps 36.21%
costs 3, 4, 5, 6, 8, 9 and 10 as a percentage of
average inventory valued at variable cost
delivered to the distribution center and add
them to the cost of money (step 1).
McGraw-Hill/Irwin Copyright
© Douglas ©
M.2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Lambert
The Impact of Inventory Turns on 5-9
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Relationship Between Inventory Turns 5-10
$275,000
$250,000
$225,000
$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$37,500
$25,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Inventory Turns
Source: Douglas M. Lambert, and Robert H. Quinn, “Profit Oriented Inventory Policies Require a Documented
McGraw-Hill/Irwin Copyright
Inventory Carrying Cost,” Business © 2001
Quarterly by 3The
46, no. McGraw-Hill
(Autumn 1981), Companies,
p.65. Inc. All rights reserved.
Annual Inventory Carrying Costs 5-11
15.00
12.50
10.00
7.50
6.00
5.00
3.75
2.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Inventory Turns
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Inventory Positions and Major Flows 5-12
in a Supply Chain
Orders Orders Orders
Payments Payments Payments
Suppliers Information Manufacturer Information Wholesalers Information Retailers
Total variable
cost of product $25
Full manufac-
tured cost $40
Selling
price $60
Source: Adapter from Douglas M. Lambert, and Mark L. Bennion, “New Channel Strategies for the 1980’s,” in Marketing
Channels: Domestic and International Perspectives, ed. Michael G. Harvey and Robert F. Lusch (Norman: Center for Economic
McGraw-Hill/Irwin Copyright © 2001
and Management Research, School of Business administration, by The
University ofMcGraw-Hill Companies,
Oklahoma, 1982), p. 127. Inc. All rights reserved.