MBA 635 project management - Handout #1-2 Little's Law

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MBA 635
Handout #1-2
Little’s Law: I = R * T
Problem #1:
A retailing company of fashion apparel reported $120,000,000 in revenues over the last fiscal
year. On average, over the same year, the company had $6,000,000 worth of inventory in their
warehouse. The units in the inventory are valued based on cost of goods sold (COGS) and the
retailer has a 100 percent markup on all of their products.
Question: How long on average does the product stay in the retailer’s inventory before it is
sold?
Steps:
a) Calculate the Average Inventory (I):
b) Determine COGS, which will represent the Flow Rate (R):
c) Use Little’s Law to find the Flow Time (T):
Problem #2:
A manufacturing company producing electrical devices reported $50 million in sales over the
last fiscal year. At the end of the same year, the company had $25 million worth of inventory of
ready-to-ship devices. The units in the inventory are valued (based on COGS) at $1,000 per unit
and are sold for $2,000 per unit.
Question: How long does a device stay in inventory before it is sold?
Steps:
a) Calculate the Average Inventory (I):
b) Determine COGS, which will represent the Flow Rate (R):
c) Use Little’s Law to find the Flow Time (T):
~ OVER ~
Problem #3:
The following table details financial data for two major US retailers; Target and Walmart.
Category
Target
Walmart
(in $ millions)
Inventories
Sales (net)
COGS
$3,643
$48,106
$41,651
$29,447
$286,103
$215,493
Question #1: How many days on average does a product stay in Target’s and Walmart’s
inventory before it is sold?
Target =
Walmart =
Question #2: What is the Annual Inventory Turnover Ratio for Target and Walmart?
NOTE: Annual Inventory Turnover Ratio = 1/T (or COGS/Average Inventory)
Target =
Walmart =
MD&A (Management’s Discussion and Analysis): Based on your answers, which company is in
a more favorable position? Briefly explain your answer and any other managerial implications.
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