Just-in-time inventory management, Financial Management

Assignment Help:

Q. Just-in-time inventory management?

It considerably improves the short-term liquidity of the business with a maximum financing requirement of $138533 rather than $155640. There is as well a more rapidly improving deficit thereafter with the balance falling to $134986 by the end of June. In the longer term nevertheless there is continued loss of profitability due to lost sales when demand is high.

The main reason for this is the reduced investment in inventory that is tying up cash. Under the original proposal there is excess inventory amounting to the next month's sales which means production is necessary at an earlier stage thereby using up cash resources.

- Interest costs as well as inventory holding costs are saved by reduced inventory levels thereby adding to profit.

- There already seems to be a just-in-time inventory management policy with respect to raw materials and work in progress and such a policy for finished goods would be consistent with this.

There is however a number of problems with just-in-time inventory management in these circumstances

- When demand is higher than expected the supplementary sales are lost as there is insufficient production to accommodate demand above the mean expected level as no inventory is carried. This nevertheless amounts to only $100 per month of sales on average which may be a price worth paying in return for improved liquidity in terms of a reduced cash deficit.

- Additionally to losing contribution there may be a loss of goodwill and reputation if customers cannot be supplied. They may perhaps go elsewhere not just for the current sale but also for future sales if Mr Geep is seen as an unreliable supplier. This outcomes from the fact that customers demand immediate delivery of orders.

- The Just-in-time management of inventory relies upon not just reliable timing and quantities but also reliable quality. The number of defects is able to be planned if it is constant but if they occur irregularly this presents an additional problem.

- If production in each month is to supply demand every month this relies on the fact that demand parallels production within the month. If most of demand is at the beginning of each month this would cause problems without a level of safety stock given that prompt delivery is expected by customers.

A number of compromises among the two positions would be possible

- Inventory could be held adequate to accommodate demand when it was high. This amounts to merely an extra $2000 at selling values thus an extra $1200 at variable cost. This is considerably lower than a whole month's production but would accommodate peak demand.

- Liquidity is very vital initially as the business attempts to become established. Smallest inventory could be held in the early months therefore with perhaps slightly increased inventory once the business and its cash flows become established.


Related Discussions:- Just-in-time inventory management

Treasury coupon strips, Observed yield on strips can be used to const...

Observed yield on strips can be used to construct an actual spot rate curve, but it is not free from drawbacks. There are some problems with this; first, the liqu

Define trustworthy collateral from the lenders perspective, What is trustwo...

What is trustworthy collateral from the lenders' perspective?  Explain whether accounts receivable and inventory are trustworthy collateral. Assets which are readily marketable

Capital budgeting, Serene Hall ?? Assignment As a consequence of the high l...

Serene Hall ?? Assignment As a consequence of the high levels of stress being recorded in the UK, and a general shift towards a healthier more relaxed lifestyle, as an essential in

Stock valuation, I just purchased a stock that would pay the dividends of t...

I just purchased a stock that would pay the dividends of the first four years as D1 = $0.65, D2 = $0.74, D3 = $0.79, D4 = $0.84. I also told that the dividends would grow continual

Calculate the companys horizon value, A. Mitt starts Examine Your Zipper In...

A. Mitt starts Examine Your Zipper Incorporated ("XYZ") in 2012 by selling common stock of $12,000,000. He promises the investors in his company a 15% return on their capital. B

Explain stronger dollar in the foreign exchange market, What kinds of U.S. ...

What kinds of U.S. companies would benefit most from a stronger dollar in the foreign exchange market?  Explain. U.S. companies that import merchandise from other countries wou

Time value of money, In order to provide for R10 million to build a new war...

In order to provide for R10 million to build a new warehouse in 5 years time, a company plans to make equal payments at the end of each six months into a fund which earns 9% per ye

Define the financial leverage effect, What is the financial leverage effect...

What is the financial leverage effect and what causes it?  What are the potential benefits and negative consequences of high financial leverage? Financial leverage is the extra

Explain the significance of financial analysis, Question 1 What are the li...

Question 1 What are the limitations of management accounting? Question 2 Explain the significance of financial analysis Question 3 What are the advantages of the value a

Why do analysts calculate financial ratios, Why do analysts calculate finan...

Why do analysts calculate financial ratios? The comparative measures are known as Ratios. Since the ratios show relative value, they permit financial analysts to compare inform

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd