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.