Inventories_in_Corporations_Today

Inventories in Corporations Today QRB 501 October 25, 2010 Inventories in Corporations Today Corporations are intently focusing on ways to reduce cost of operations and to increase profit margins. Inventory management is an essential part of cost reduction efforts. This paper will take a close look at five corporations and the way that these different corporations manage their inventories. The different management methods will be compared and contrasted to point out the advantages and disadvantages of the inventory management methods. Walmart Walmart is a global retail corporation that has 8,416 worldwide. Walmart deals with billions of dollars in inventory, so management of that inventory is crucial. Walmart uses just-in-time (JIT) inventory methods since 2006. The JIT method allowed Walmart to significantly reduce the amount of inventories that they maintain, while still meeting the demands of the consumers. Walmart determines the value of their inventory based on a first in last out (FILO) method. The FILO method provide tax advantages and also allows Walmart to recognize higher profit margins on products that they purchased earlier and the sold later when the value was increased by inflation. According to Annual reports Walmart’s inventories were growing at an increasing rate until JIT was implemented in 2006. Since 2006 Walmart’s inventory growth started to slow and has begun to decrease since 2008. While JIT is providing cost benefits for Walmart, it provides enormous pressure on their suppliers. Suppliers who do business with Walmart are forced to either keep large inventories of their own to meet the instant demands of Walmart, or they must alter their methods of manufactures. Supplier that can’t keep large inventories must find cost effective ways of manufacturing small batches quickly. According to Atkinson, organizations such as Walmart can make these kinds of demands on the suppliers due to the volume of business that they conduct. Table one shows the last eight years of inventory data. Table 1 |Year |2010 |2009 |2008 |2007 | |Turnover Rate |4.5 |4.2 |4 |4.1 | |Turnover in Days |81.1 |86.9 |91.25 |89 | The following statement summarizes the current inventory management at Home Depot after 30 years in business “At the end of fiscal 2009, Home Depot had $10.2 billion worth of inventory on its books. But knowing where things are is a problem that has vexed Home Depot management and customers alike.” There are still inefficiencies in the supply chain management as well as chain wide/store inventory management. These inefficiencies include: excessive or short inventory positions, expedite fees when stock levels are critically low, labor spent managing inventory, reduced supplier economics of scale, and reduced customer satisfaction. Investors used to a high revenue growth cycle year-over-year through 2007 to a high of $90B, now would like to see a baseline and positive control of supply and inventory management. Competitors in the space like Lowe’s Companies are gaining market share and have lower inventory turnover rates and utilize different size stores depending on the local market conditions to control inventory. Dell Dell is the largest computer-systems company based on estimates of global market share. It is also the fastest growing of the major computer-systems companies competing in the business, education, government, and consumer markets. Dell’s product line includes desktop computers, notebook computers, network servers, workstations, and storage products. Michael Dell founded the company based on the concept of bypassing retailers and selling personal computer systems directly to customers, thereby avoiding the delays and costs of an additional stage in the supply chain. Much of Dell’s superior financial performance can be attributed to its successful implementation of this direct-sales model. (Atkinson, 2005). While the computer industry has grown tremendously over the past decade, firms in this industry face their own challenges. First, rapid changes in technology make holding inventory a huge liability. Many components lose 0.5 to 2.0 percent of their value per week, and a supply chain packed with yesterday’s technology is nearly worthless. With its direct sales, however, Dell carries very little inventory: the whole organization concentrates on speeding components and products through its supply chain. Dell delivers new products to market faster than its competitors and does not have to sell old products at a discount, because it has none. (Atkinson, 2005). Just-In-Time JIT is an inventory system that companies use to deliver a finished product to customers in the quickest time possible to reduce the overall ordering and inventory holding cost (Atkinson, 2005). The system proves to be most effective for companies that lose money for holding a product in its inventory for an extended period of time and that have the capability of lowering its ordering cost to make to profit. Advantages. Dell computers are a prime example of how using JIT reduced cost and improved the overall performance of their company. According to Atkinson, a computer loses value at a fast rate as it sits in inventory; therefore it is financially smart to supply customers with products as they are ordered. For every computer that sits in Dell warehouse over a span of seven days, one percent of its value is lost (Atkinson, 2005). To show how low inventory saved Dell money overtime a case study was conducted. According to Atkinson, ten years of data was pulled from www.themanufacturer.com that showed how many weeks worth of inventory a firm has by dividing the inventory turnover by 52 (Atkinson, 2005). Dell’s Inventory Turnover Data is shown in table three. Table 3 |Year |1993 |1994 |1995 |1996 | |Inventory |$509 |$346 |$270 |$165 | *Dollar amount in Millions Advantages of SAP are: Integration, Efficiency, Cost Reduction, and Accuracy. Disadvantages of using SAP can be listed as expensive and inflexible. (I will expand this section tonight, Nelson). Hewlett-Packard Hewlett-Packard Company as known as HP is an American multinational information technology corporation. There company’s headquarters are in Palo Alto, California. Hewlett-Packard was founded in 1939 by Bill Hewlett and Dave Packard, and it is now one of the world’s largest information technology companies, operating in nearly every country. Hewlett-Packard uses the JIT inventory for their company. JIT inventory is described as a production and inventory control system. JIT is known for purchasing materials and producing units only as needed to actual customer demand. In addition, it focuses not on raw materials but on finished goods. JIT relies on the efficient monitoring of the usage of materials in the production of goods (Tatum, 2010). JIT manufacturing has some benefits when a company decides to use their system. According to Accounting for Management, there are main benefits from using JIT. They are as followed: 1. Funds that were tied up in inventories can be used elsewhere. 2. Areas previously used, to store inventories can be used for other more productive uses. 3. Throughput time is reduced, resulting in greater potential output and quicker response to customers. 4. Defect rates are reduces, resulting in less waste and greater customer satisfaction. Today many companies find it that reducing inventory is not enough for their organization. These companies have to find ways to stay competitive in the business world. These advantages help companies stay competitive and strive for improvement within their company. There are also disadvantages for using JIT. The disadvantages open up risks for your business associated with the supply chain. If the company has no stocks to fall back on, a minor disruption in supplies to your business from just one supplier could force the production to cease. Hewlett-Packard Inventory Data Table 4 |Year |2009 |2008 |2007 |2006 | |Inventory |$114,552 |$118,364 |$104,286 |$91,658 | *Dollar amount in Millions Table 4 shows the net revenue from 2006 until 2009 fiscal year. Since 2006, revenue at Hewlett-Packard increased each year. In 2007, Hewlett-Packard’s revenue was $ 104 billion, making HP the first IT company in history to report revenues exceeding $100 billion. References Atkinson, C. (2005). Inventory Management Review. Retrieved 23, October 2010 from https://www.inventorymanagementreview.org/justintime/ Atkinson, C., (2006). Wal-Mart Increases its Supplier's Inventory Levels. Retrieved October 23, 2010 from http://www.inventorymanagementreview.org/2006/04/walmart_increas.html Beard, L., & Butler, S. (2000). Introducing JIT Manufacturing: It's Easier Than You Think. Business Horizons, 43(5), 61. Retrieved October 21, 2010 from Business Source Complete database. Hewlett-Packard (2009). Annual Report. Retrieved on October 21, 2010 from http://www.hp.com Home Channel News Editor, (2005, July). Home Depot spells out supply chain strategy. Home Channel News, URL: http://www.homechannelnews.com/story.aspx' Ryan, K. (2008, December 15). HD's supply chain initiative: Big Orange looks to turn inventory woes into profits. Retrieved October 20, 2010 from Home Channel News, URL: http://findarticles.com/p/articles/mi_m0VCW/is_16_34/ai_n31145724/ SC Digest Editorial Staff, (2007, March 1). Supply Chain Strategy: Home Depot says it’s Ready for Supply Chain Transformation. Retrieved October 19, 2010 from Supply Chain Digest, URL: http://www.scdigest.com/assets/Newsviews/07-03-01-2.cfm'cid=912 Tatum, M. (2010). What is a Just In Time Inventory' Retrieved October 24, 2010 from Wise Geek, URL: http://www.wisegeek.com/ Tobin Ramos, R. (2010, March 29). Home Depot getting better handle on products. Retrieved October 21, 2010 from Atlanta Business News, URL: http://www.ajc.com/business/home-depot-getting-better-416384.html Walmart 2010 Annual Report. Retrieved October 21, 2010 from the World Wide Web. Welcome to Accounting to Management (2009). Just in Time Manufacturing and Inventory Control System. Retrieved on October 23, 2010 from http://www.accountingformanagement.com