Part VII Short Term Financial Planning and Management
Prepared by: Thomas J. Cottrell
Modified by: Carlos Vecino HEC-Montreal
Chapter 18
Short-Term Finance and Planning
Chapter 19
Cash and Liquidity Management
Chapter 20
Credit and Inventory Management
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 1
Managers Who Deal with Short-Term Financial Problems (Table 18.1)
Title of manager
Duties related to short-term
financial management
Assets/liabilities influenced
Cash manager
Collection, concentration, disbursement;
short-term investments; short-term borrowing;
banking relations
Cash, marketable
securities, short-term loans
Credit manager
Monitoring and control of accounts
receivable; credit policy decisions
Accounts receivable
Marketing manager
Credit policy decisions
Accounts receivable
Purchasing manager
Decisions on purchases, suppliers; may
negotiate payment terms
Inventory, accounts payable
Production manager
Setting of production schedules and
materials requirements
Inventory, accounts payable
Payables manager
Decisions on payment policies and on
whether to take discounts
Accounts payable
Controller
Accounting information on cash flows;
reconciliation of accounts payable; application
of payments to accounts receivable
Accounts receivable,
accounts payable
Source: Ned C. Hill and William L. Sartoris, Short-Term Financial Management, 2nd ed. (New York: Macmillan, 1992), p. 15.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 2
Survey: The Importance of Short-Term Finance and Planning
Long-term investment decisions (capital budgeting) and long-term
financing decisions are characterized by the facts that they (a)
generally involve large amounts of money, and (b) are relatively
infrequent occurrences.
Decisions that come under the heading “short-term finance” are equally
important, because, while typical decisions often don’t involve as much
money, decisions are much more frequent. This is suggested in the
results of a recent survey of CFOs.
Activity
Financial Planning
Working Capital Mgmt.
Capital Budgeting
Long-Term Financing
Total
Ranked Greatest
Importance
59%
27%
Average Time
Allocated
35%
32%
9%
5%
19%
14%
100%
100%
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 3
Cash Flow Time Line (Figure 18.1)
Operating and Cash cycles
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 4
Hermetic, Inc., Operating Cycle

The operating cycle
a)
Finding the inventory period
COGS
$480
Inventory turnover =
=
Avg. inventory
= 1.362 times
$352.5
365
Inventory period =
= 268 days
1.362 times
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 5
Hermetic, Inc., Operating Cycle (concluded)
b) Finding the accounts receivable period
Credit sales
Receivables turnover =
$710
=
Avg. receivables
= 2.491 times
$285
365
Receivables period =
= 147 days
2.491 times
Operating cycle = Inventory period + Receivables period
= 268 + 147 = 415 days
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 6
Hermetic, Inc., Cash Cycle
 The cash cycle
a) Finding the payables turnover
COGS
Payables turnover =
Avg. payables
$480
=
= 2.043 times
$235
365
Payables period =
= 179 days
2.043 times
Cash cycle = Operating cycle - Payables period = 415 - 179 = 236 days
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 7
The Size of the Firm’s Investment in Current Assets
 The size of the firm’s investment in current assets is
determined by its short-term financial policies.
 Flexible policy actions include:

Keeping large cash and securities balances

Keeping large amounts of inventory

Granting liberal credit terms
 Restrictive policy actions include:

Keeping low cash and securities balances

Keeping small amounts of inventory

Allowing few or no credit sales
Is it better Flexible or Restrictive ?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 8
Cost of holding current assets
 Carrying cost (costs that rise with the amount held in assets)
Financial cost, storage cost and other costs of holding current
assets.
 Shortage cost (cost that decrease with the amount held in assets)
Cost of not having current assets available on-hand, or having to get
them rapidly.
The optimal choice of holding current assets is a trade-off of:
 Carrying
costs
versus
Shortage costs:
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 9
Total Cost of holding current assets (Cash, receivables and inventory)
Cost ($)
Total holding cost
Carrying cost
Shortage cost
Amount of assets
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 10
Carrying Costs and Shortage Costs (Figure 18.2)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 11
Carrying Costs and Shortage Costs (Figure 18.2)
When is a “Flexible policy” appropriate?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 12
Carrying Costs and Shortage Costs (Figure 18.2)
When is a “Restrictive policy” appropriate?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 13
Financing Policy for an “Ideal” Economy (Figure 18.3)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 14
Alternative Asset Financing Policies (Figure 18.5)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 15
A Compromise Financing Policy (Figure 18.6)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 16
A Closer look to Cash, Credit and Inventory
 Cash policy

What is the tradeoff between carrying a large versus a small cash
balance?

What is the proper management of the cash balance?
 Credit policy
 What is the tradeoff between a flexible versus a restrictive credit
policy?
 Analysis of a credit policy change
 Credit information and evaluation of customer credit capacity
 Inventory policy
 What are the components of an inventory management system?
 Use of EOQ inventory model
 Inventory management systems
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 17
A Closer look to Cash, Credit and Inventory
Cash Policy
 Credit Policy
 Inventory Policy
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 18
Reasons for Holding Cash
 Speculative Motive - the need to hold cash to take advantage of
additional investment opportunities, such as bargain purchases.
 Precautionary Motive - the need to hold cash as a safety margin to act
as a financial reserve.
 Transaction Motive - the need to hold cash to satisfy normal
disbursement and collection activities associated with a firm’s ongoing
operations.
 Compensating Balance Requirements - cash balances kept at
commercial banks to compensate for banking services the firm receives.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 19
Determining the Target Cash Balance
 Optimal choice of cash balance is a trade-off of

Carrying costs: Opportunity costs of holding cash instead
of some other income-producing asset.
versus

Shortage costs: Cost of not having cash available
on-hand,or having to rapidly get the cash.
 Other factors influencing the target cash balance

Ability to borrow rather than marketable securities

Scale economies in cash management - large firm advantage.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 20
Determining the Target Cash Balance (Figure 19.1)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 21
Cash
Balance
Cash Balances - The Baumol-Allais-Tobin BAT Model
Starting (C)
Average (C/2)
Ending=0
Minimum cash allowed
Time in days, weeks, etc.
2
4
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 22
Cost minimization model
We seek to find the minimum cost of meeting the short-term cash
needs
 F = Fixed cost of selling securities to replenish cash
 T = Total amount of new cash needed for transactions
purposes over the relevant planning period (e.g. over a year)
 R = Opportunity cost of holding cash (e.g. the interest rate on
marketable securities)
Total Cost = Total Opportunity cost + Total Trading cost
Total Opportunity cost = (Average balance) (R) = (C/2)(R)
Total Trading cost = (T/C) (F)
Total Cost = (C/2)(R) + (T/C) (F)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 23
Optimal Solution
 Differentiate the Total Cost with respect to the cash balance to
find the...
Optimal Cash Balance, when dTC/dC = R/2 + (-1)TF/C2 = 0
2TF
C =
R
*
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 24
Example 19A.1 (pp 663-664)
Vulcan corp. has outflows of $100 per day, seven days a week
R= 5%, F=$10 per transaction
C* = ? Total Cost = ?
 T = Total Cash needed per year = 365 * $100 = $36,500
 Optimal Balance (C*)

C = SQRT(2TF/R) = SQRT(2 * $36,500 * $10 / 0.05) = $3,821
Optimal Balance (C*) =$3,821

Average Cash Balance = $ 1,911

 Total cost






Opportunity Costs = C/2*R= $1,911 (0.05) = $96
The re-supply time is $3,821/$100 per day = 38.21 days
Number of re-supplies per year = 365 / 38.21 = 9.6 times
Total Trading Costs = 9.6 ($10) = $96
Total Cost = Opportunity cost + Trading cost = $96 + $96
Total Cost = $192
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 25
The Cash Budget
Objective: Identification of short term financial needs, cash
surpluses or deficits.
 Main source of cash : Sales and Cash Collections
 Other sources of cash: Asset sales, investment income, loans,
increase in equity, etc.
 Main Cash Outflows :
 Payments of accounts payable
 Wages, Utilities and other expenses
 Taxes
 Capital expenditures – Fixed assets acquisitions
 Debt services and principal payments
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 26
Example: Cash Budget for Ajax Company
 All sales on credit
 Dec. sales were $95,000 ; Expected Jan 55,000 Feb & March 65,000
 December 31 receivables were $135,000
 Accounts receivable period is 45 days (50% - 30 days, 50% - 60 days)
 Wages, taxes, and other expenses are 30% of sales
 Raw materials are ordered two months in advance of sales
 Raw materials are 50% of sales
 All purchases on trade credit
 An annual dividend of $100,000 is expected to be paid in March
 No capital expenditures are planned for the first quarter
 The beginning cash balance is $41,000
 The minimum cash balance is $25,000
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 27
Example: Cash Budget for Ajax Company (continued)
 Cash collections for Ajax
(all figures rounded to the nearest dollar)
JAN
FEB
MAR
$135,000
$102,500
$ 92,500
Sales
55,000
65,000
65,000
Cash collections
87,500
75,000
60,000
$102,500
$ 92,500
$ 97,500
Beginning receivables
Ending receivables
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 28
Example: Cash Budget for Ajax Company (continued)
 Cash disbursements for Ajax
JAN
FEB
MAR
$ 32,500
$32,500
$30,000
16,500
19,500
19,500
Capital expenditures
0
0
0
Long-term financing expenses
0
0
100,000
$ 49,000
$52,000
$149,500
Payment of accounts
(50% of next month’s sales)
Wages, taxes, and other
Total
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 29
Example: Cash Budget for Ajax Company (continued)
 Net cash inflow for Ajax
Total cash collections
Total cash disbursements
Net cash inflow
JAN
FEB
MAR
$ 87,500
$ 75,000
$ 60,000
49,000
52,000
149,500
$ 38,500
$23,000
-$ 89,500
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 30
Example: Cash Budget for Ajax Company (concluded)
 Cash balance for Ajax
JAN
FEB
MAR
$ 41,000
$79,500
$102,500
38,500
23,000
-89,500
Ending cash balance
$ 79,500
$102,500
$ 13,000
Minimum cash balance
- 25,000
- 25,000
- 25,000
Cumulative surplus (deficit)
$ 54,500
$ 77,500
-$ 12,000
Beginning cash balance
Net cash inflow
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 31
A Closer look to Cash, Credit and Inventory
 Credit Policy
Credit Policy
 Inventory Policy
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 32
Components of Credit Policy
 Terms of sale
The conditions under which a firm sells its goods and services
for cash or credit.
 Credit analysis
The process of determining the probability that customers will
not pay.
 Collection policy
Procedures followed by a firm in collecting accounts receivable.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 33
The Cash Flows from Granting Credit
Credit
sale is
made
Customer
mails
check
Firm deposits
check in
bank
Bank credits
firm’s
account
Time
Cash collection
Accounts receivable
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 34
Determinants of the Length of the Credit Period
 Several factors influence the length of the credit cycle.
Among these factors are:







Perishability and collateral value
Consumer demand for the product
Cost, profitability and standardization
Credit risk of the buyer
The size of the account
Competition in the product market
Customer type
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 35
Credit Policy Effects
 Revenue effects
Payment is received later, but price and quantity sold may increase
 Cost effects
Running a credit department and collecting receivables has costs
 The cost of debt
The firm must finance receivables and, therefore, incur financing costs
 The probability of nonpayment
The firm always gets paid if it sells for cash, but risks losses due to customer
default if it sells on credit
 The cash discount
Discounts induce buyers to pay early; the size of the discount affects
payment patterns and amounts
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 36
Evaluating a Proposed Credit Policy
P
v
Q
Q’
R
=
=
=
=
=
price per unit
variable cost per unit
current quantity sold per period
new quantity expected to be sold
periodic required return
The benefit of switching is the change in cash flow:
New cash flow - old cash flow
[(P - v)  Q’] - [(P - v)  Q]
rearranging,
(P - v)  (Q’ - Q)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 37
Evaluating a Proposed Credit Policy (concluded)
The present value of switching is:
PV = [(P - v)  (Q’ - Q)]/R
The cost of switching is the amount uncollected for the period +
the additional variable costs of production:
Cost = PQ + v(Q’ - Q)
And the NPV of the switch is:
NPV = -[PQ + v(Q’ - Q)] + [(P - v)(Q’ - Q)]/R
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 38
The Costs of Granting Credit (Figure 20.1)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 39
The Five C’s of Credit
 Character
The borrower’s willingness to pay
 Capacity
The borrower’s ability to pay
 Capital
Financial reserves/borrowing capacity
 Collateral
Pledged assets
 Conditions
Relevant economic conditions
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 40
A Closer look to Cash, Credit and Inventory
 Credit Policy
 Credit Policy
Inventory Policy
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 41
Inventory Management
 Inventory Types
 Raw Materials
 Work-in-Progress
 Finished Goods
 Inventory Costs
 Storage and tracking costs
 Insurance and taxes
 Losses due to obsolescence, deterioration, or theft
 Opportunity cost of capital on the invested amount
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 42
Costs of Holding Inventory (Figure 20.5)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 43
Inventory Management Techniques
 ABC Approach
 Compare number of items with the value of the items
 An illustration of the “80-20” rule
 EOQ Model
Economic Order Quantity is most widely known approach.
 Inventory depletion rate
 Carrying costs
 Shortage costs and Restocking costs
 Total costs
 Extensions to EOQ
 Safety stocks
 Reorder points
 MRP - Material Requirements Planning
 Just-in-Time Inventory
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 44
ABC Inventory Analysis (Figure 20.4)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 45
Inventory Holdings for the Transcan Corporation (Figure 20.6 )
The Transcan Corporation starts with inventory of 3,600 units. The quantity drops to zero by
the end of the fourth week. The average inventory is Q/2 = 3,600/2 = 1,800 over the period.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 46
Cost minimization –The Economic Order Quantity EOQ model
We seek to find the minimum cost of holding inventory by defining
what size order the firm should place when restocking.
 Q = Quantity of restocking (size order)
 F = Fixed cost per order
 T = Total unit sales per year
 CC = Carrying Cost of holding inventory (e.g. financial, storage,
insurance, obsolescence, deterioration and theft costs)
Total Cost = Total Carrying cost + Total Restocking cost
Total Carrying cost = (Average stock) (CC) = (Q/2)(CC)
Total Restocking cost = (T/Q) (F)
Total Cost = (Q/2)(CC) + (T/Q) (F)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 47
Optimal Solution
 Differentiate the Total Cost with respect to the size order “Q” to
find the...
Optimal size order “Q*”, when dTC/dQ = CC/2 + (-1)TF/Q2 = 0
2TF
Q =
CC
*
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 48
Solution to Problem 20.11
 Bell Mfg. uses 1,600 switch assemblies per week and then
reorders another 1,600. If the relevant carrying cost per
assembly is $40, and the fixed order cost is $800, is Bell’s
inventory policy optimal? Why or why not?
Carrying costs = (_____/2)($40) = $_____
Order costs = (52)($_____) = $_____
EOQ = [2(52)(1,600)($800)/$40]1/2 = _____ units
The firm’s policy (is/is not) optimal, since the costs are
not equal.
Bell should _______ the order size and _______ the number of
orders per year.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 49
Solution to Problem 20.11
 Bell Mfg. uses 1,600 switch assemblies per week and then
reorders another 1,600. If the relevant carrying cost per
assembly is $40, and the fixed order cost is $800, is Bell’s
inventory policy optimal? Why or why not?
Carrying costs = (1,600/2)($40) = $32,000
Order costs = (52)($800) = $41,600
EOQ = [2(52)(1,600)($800)/$40]1/2 = 1,825 units
The firm’s policy is not optimal, since the costs are
not equal.
Bell should increase the order size and decrease the number of
orders per year.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 50
Material Requirements Planning (MRP) - Safety Stocks and Reorder Points (Figure 20.7)
Inventory
A. Safety Stocks
Minimum inventory level
Safety Stocks
Time
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 51
Material Requirements Planning (MRP) - Safety Stocks and Reorder Points (Figure 20.7)
Inventory
B. Reorder points
Minimum inventory level
Delivery
time
Delivery
time
Time
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 52
Material Requirements Planning (MRP) - Safety Stocks and Reorder Points (Figure 20.7)
Inventory
Delivery
time
Delivery
time
B. Reorder points
Minimum inventory level
Safety Stocks
Time
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 53
Just – in – Time Inventory
 Basic Idea: Parts, Raw Material and in general “Work In
Process components” are delivered exactly as needed for
production
 Objective: Minimize Inventory
 Production Objective?
 Is Just-in-time consistent with EOQ?
 Financial Objective ?
 How does JIT fits into Du-Pont?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 54