We have learned the importance to have the right amount of inventory in order to satisfy customers demand. Inventory also affects companies’ financial systems. One of the ways to see the impact of inventory is to measure ROI (Return on investment). ROI is the ratio of Profit and Capital employed. Lets first talk about how inventory affects profit. Inventory affects Profit because the cost of inventory reduces Revenue. Logistics efficiency would be important to reduce these operational costs. I would say that to increase efficiency you can reduce lead times, have better transportation and good relationships with suppliers.
The capital employed is affected by inventory, accounts receivables, cash and fixed assets. Capital employed is affected two times by inventory. First by Inventory, that is the amount of money invested on the products plus the holding cost. This is the part that puts more money in the capital. Inventory also affects Account Receivable because you don’t have the product in your warehouse anymore but us money that your customer owes you. Companies should take care of this; they should deliver as fast as they can the product and make sure they get pay for it. There are some policies that they can use with their customer in order to cash their money.
If companies reduce the costs of inventory, have the correct amount of product in their warehouse and reduce the customers’ debt; they can have a better value of ROI.
Andrea Luque
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2 comments:
Great post Andrea!
I wanted to elaborate on your discussion of the relationship of Accounts Recievables and Inventory. If companies can decrease their A/R, they can bring their cash in quicker and better manage the financial capital that they employ. Therefore, speed is crucial to a sound inventory management policy.
-Andrew Freeman
In addition, if firms can maintain lower levels of inventory, they will be able to achieve a higher level of inventory turnover. Firms must also work with their billing departments with respect to the AR turnover because like Andrew said, the faster they can bring in the cash, the better financial shape they will be in and the more capital they will have on hand to spend.
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