Inventory and Production Management • Improved feedback regarding unsatisfactory

products or services
Learning Objectives
• Improvements in planning, controlling, and
• What value chain relationships are important to problem solving
organizations? • Shared managerial and technical expertise,
• What costs are associated with buying, supervision, and training
producing, and carrying inventory? Increased Productivity
• How do push and pull systems control • Reduces investments in inventory
production? • Improves cash-to-cash cycle time
• Why do product life cycles affect profitability? • Generates higher asset turnover
• What is target costing, and how does it • Generates higher inventory turnover
influence production cost management? • Reduces inventory risk
• What is the just-in-time (JIT) philosophy and
what modifications does JIT require in
accounting systems?
• What are flexible manufacturing systems?
• Why are lean enterprises important in today’s
business environment?
• How can the theory of constraints help in
determining production flow?
Inventory Items
• Inventory is often a firm’s largest investment
• Merchandise for resale
• Manufacturing raw materials, work-in-process
and finished goods
• Firms today should minimize inventory while
meeting customer demands
Managing inventory
The goal is to minimize the company’s monetary
commitment to inventory without negatively impacting
product availability
Value Chain
A set of value-adding functions and processes
that converts inputs into products or services

*Communicate strategy to all members of the chain.

Value Chain Improvements

• Improved communication of requirements and
specifications
• Greater clarity in requests for products or
services
 • Target cost approach
– 1st: Set sales price
– 2nd: Set profit
– 3rd: Compute target cost
– 4th: Design product
(BEFORE PRODUCT DESIGN)
Target Cost Implications
• If target cost too high
– Change product design or production
process
• Use cost tables to find impact on
product costs of different inputs,
processes, and specifications
– Accept less-than-desired profit margin
– Do not enter the market
Engineering
• Use value engineering to find a combination of
resources and methods to
– Increase product functionality
– Reduce costs
Product Life Cycles: Development
• Engineering changes during production are
• Development (R&D) costs expensed as incurred
expensive
in financial accounting
– Production documents are
• Decisions made during the development stage
revised/reprinted
represent 80% to 90% of product’s total life-
– Workers relearn tasks
cycle costs
– Machine setups are changed
Product Life Cycles: Introduction
– Parts may be made obsolete
• Substantial costs including engineering changes,
Kaizen
market research, advertising, and promotion
• Continuous improvement
• Sales price matches similar or substitute goods
– Reduce product costs
• Sales low
– Increase product quality
Product Life Cycles: Growth
– Improve production process
• Increased sales
Traditional Manufacturing
• Quality may improve
• Smooth operating activity
• Prices stable
– Steady use of workforce
Product Life Cycles: Maturity
– Continuous machine utilization
• Sales stabilize or decline slowly
• Spread overhead over a maximum number of
• Firms compete on selling price
products
• Costs at lowest level
• Inventory levels high enough to cover up
Product Life Cycles: Decline
inefficiencies in acquisition and/or production
• Waning sales
Just-in-Time (JIT)
• Dramatic price cuts
• Eliminate any process or operation that does
• Cost per unit increases as fixed costs are spread
not add value
over fewer units
• Continuous improvement in
Target Costing
production/performance efficiency
• Traditional approach
• Reduction in total cost of
– 1st: Product design
production/performance while increasing
– 2nd: Compute cost
quality
– 3rd: Set sales price
– 4th: Profit or loss
(AFTER PRODUCT DESIGN)
JIT Plants
• Minimize material handling time, lead time, JIT - Supplier Relationships
movement of goods • Limited number of certified vendors who can
• Use manufacturing cells which allow for visual provide quality and reliability
controls, greater teamwork, quick exchange of • Vendors become “partners”
vital information • Consider
• Reduce storage – Reliability and responsiveness
• Increase throughput – Delivery performance
• Develop multiskilled workers – Service
• Use automation—programmed factory – Human resources qualifications
equipment – Research and development strength
– Production capacity
– Environmental policies
JIT - Product Design
• Fewest number of parts
• Standardized parts
• Minimize production steps
• Quality designed into product
• Minimal engineering changes
• Recyclability of the product
JIT - Product Processing
• Reduce machine setup time
– Perform setup while machine is running
– Eliminate all unnecessary movements by
JIT Manufacturing workers and/or materials
• JIT Manufacturing attempts to – Use setup teams
– Acquire components and produce • Continuous quality
inventory units only as they are needed – Ensure vendor quality at point of
– Minimize product defects purchase
– Reduce cycle/setup times for acquisition – Monitor worker and machine quality
and production • Standardizing work
• Kanban—a card indicating a work center’s need – Standard procedures
for additional components – Without variation
– On time
– Every time
JIT Support Systems and Logistic Support
• JIT support systems
– Six-sigma method
– Internet business model
– Supply-chain management
– Business-to-business e-commerce
• Transactional
• Information sharing
• Collaborative
• Logistic support
– Open buying on the Internet
– Focused factory arrangements for
vendors
• Connect vendors closely to
production operations
 • May involve relocation or plant Costing Methods: Shipped when Completed
modernization by vendors as well Traditional
as financial assistance from 1. RIP Inventory
manufacturer AP
JIT and Variances 1. Conversion Costs
• Minimal variance reporting and analysis Various Accounts
• Workers monitor quality and prevent defects 1. RIP Inventory
• Variances first appear in physical not financial Conversion Costs
measures 1. Finished Goods
• Long-term price agreements minimize direct RIP Inventory
material price variances 1. Cost of Goods Sold
Finished Goods
• Vendor quality agreements minimize direct AR
material usage variances Sales
• Automated JIT systems minimize labor variances
• Direct labor and overhead combined into Shipped when completed
conversion costs 1. RIP Inventory
• Engineering changes may cause material, labor, AP
overhead, and/or conversion variances 2. Conversion Costs
Costing Methods: Short Production Time Various Accounts
Traditional
3. Finished Goods
1. RIP Inventory
Costs of Goods Sold
AP
RIP Inventory
1. Conversion Costs
Conversion Costs
Various Accounts
4. AR
1. RIP Inventory
Sales
Conversion Costs
Costing Methods: Ultimate JIT
1. Finished Goods
Traditional
RIP Inventory
1. RIP Inventory
1. Cost of Goods Sold
AP
Finished Goods
1. Conversion Costs
AR
Various Accounts
Sales
1. RIP Inventory
Conversion Costs
Short Production Time
1. Finished Goods
• Conversion Costs
RIP Inventory
Various Accounts
1. Cost of Goods Sold
RIP Inventory
Finished Goods
Finished Goods
AR
AP Sales
Conversion Costs Ultimate JIT
Cost of Good Sold 1. Conversion Costs
Finished Goods Various Accounts
3. AR 2. RIP Inventory (minimal)
Sales Finished Goods (minimal)
Costs of Goods Sold
AP
Conversion Costs
4. AR
Sales
Costing Methods: Backflush
Traditional
1. RIP Inventory
AP
1. Conversion Costs
Various Accounts
1. RIP Inventory
Conversion Costs
1. Finished Goods
RIP Inventory
1. Cost of Goods Sold
Finished Goods
AR
Sales
Backflush
1. Conversion Costs
Various Accounts
2. Costs of Goods Sold
AP
Conversion Costs
3. RIP Inventory
Finished Goods
Cost of Goods Sold
4. AR
Sales
Flexible Manufacturing System (FMS)
– Network of robots and material
conveyance devices monitored and
controlled by computers
– Modular factories
– Customization
– Quick, inexpensive production changes
Computer-Integrated Manufacturing (CIM)
– Two or more FMSs connected via host
computer and information system
Theory of Constraints (TOC)
• Constraint—anything that confines or limits a
person or machine’s ability to perform a project
or function
– Human constraints
– Material constraints
– Machine constraints
• Place quality control
points before bottlenecks

Quantitative methods
Economic Order Quantity
• The least costly number of units to order at a
single time
Potential Ethical Issues
• Producing inventory not needed driven by
achieving operating profits
• Avoiding innovative production and inventory
driven by avoiding short-run costs
• Blaming suppliers for inventory mistakes caused
by management
• Failure to write-down obsolete or spoiled
inventory in a timely manner
• Using coercion to force supplies to give price
concessions
• Using the adoption of emerging production and
inventory methods to fire workers