Download InventoryManagementDaysofSupplyLessonPlan

Supply Chain Management Lesson Plan
Topic- Inventory Management- Days of Supply-Teacher Notes
Purpose
-
To learn about factors that influence the amount of inventory carried
Calculate days of supply
Explain the significance of days of supply measurement
To learn about the impact of inventory on cash flow
Connection to high school curriculum
BBI10/BBI20- Introduction to Business(Gr 9/10)- wants and needs, supply and demand, managing
inventory.
BAN4E- Accounting for Small Business (Gr 11/12)- Service and Merchandising- calculate inventory
turnover and explain the significance. Many companies use Days of Supply rather than inventory turns as
it is easier for all employees to understand conceptually.
BDI3C- Entrepreneurship (Gr 11/12)- Developing and Completing a Venture Plan for the Proposed
Business- identify the principles of inventory management and explain the importance of inventory
management for an entrepreneur.
BMI3C- Marketing: Goods, Services, Events (Gr 11)-Marketing Mix- explain different systems of inventory
control
BOG4B- Business Leadership-Operations Management (Gr 12)- Identify the factors used in determining
how much stock to carry of each item.
Introductory Class Discussion
Effectively managing inventories is important for any organization; whether it is retail,
manufacturing, transportation and distribution, or service like a doctor’s office. In the textbook
“The World of Business” inventory management is defined as, “Balancing product quantity with
sales; having merchandise when it is needed and not having merchandise when it is no longer
needed.”(Glossary, p. 502) Holding inventory costs money, and a business makes money only
when it sells that inventory. On the other hand, when inventory is not available, customers are
not always willing to wait and may go to another business, resulting in a lost sale. The question
becomes, what is the right amount of inventory to hold in your company?
There are many tools available to a skilled supply chain analyst to help make this decision. One of
the key tools used in this determination is a calculation known as the ‘Days of Supply’. ‘Days of
Supply’ is the measurement of the number of days of average sales you are holding in inventory.
Conestoga College Supply Chain
Inventory Management- Days of Supply
Teacher Notes
The formula for calculating days of supply is;
Days of Supply = Inventory amount on hand / Average daily sales
Why is this measure important?
Our information regarding sales is very accurate today. However, the farther into the future we
look, the less accurate our picture becomes regarding future sales. So, if future demand for an
inventory item falls off and we are holding too many days of inventory, our firm could be stuck
with product we can’t sell. This is particularly critical for products with a limited shelf life.
Conversely, if future demand for a product rises and we are holding too few days of inventory,
we could run out of stock and lose sales.
Questions for students – (Have the students work in pairs to answer the questions in each
Example, then take up the answers together in class.) Student handout is attached.
What causes demand for an item to change?
- Shifting consumer tastes, weather, seasonality, price change, etc.
What are some implications of our firm being stuck with product we can’t sell?
- Obsolete stock, cost of holding inventory, distress selling, lower profits, etc.
What are some implications of running out of stock?
- Lost sales, lost customer loyalty, lower profits, etc.
As a result, ‘Days of Supply’ is an important measure for a supply chain analyst. Its real value
becomes clear when we consider the amount of time it takes our firm to replenish inventory
following a sale. An example will help in understanding this. (Have the students work in pairs to
answer the questions in each Example, then take up the answers together in class.)
Examples 1. On April 1, a company has 1500 bags of topsoil on hand, with average daily sales of 800
bags per day. Calculate the days of supply for the bags of topsoil.
Days of supply = 1500/800=1.9 days
It takes seven days to replace our topsoil inventory once we place an order with our
topsoil supplier. Top soil has an unlimited shelf life.
Conestoga College Supply Chain
Inventory Management- Days of Supply
Teacher Notes
Questions As the supply chain analyst for the top soil, what are the key factors to consider in this
situation?
Only 1.9 days of supply. We are at risk of stocking out, and therefore lost sales if there is
a small increase in demand. If demand drops we will have a relatively low amount of
inventory to sell. We are not concerned about shelf life. We can replace the inventory in
two weeks.
What actions will you recommend that your firm take regarding top soil inventory levels?
I would recommend increasing the inventory to at least 7 or 8 Days of Supply, as it takes
7 days to receive top soil from our supplier once ordered. I would monitor that level,
and look to reduce it back down to 1 – 2 Days of Supply as we approach the end of May
when the demand for top soil will drop off.
2. A Waterloo company sells Florida orange juice. The firm has 280 cases in inventory, and
sells 40 cases of orange juice per week. Calculate the days of supply for the orange juice.
Days of supply = 280/(40/7 days)=49 days
The orange juice the firm sells is fresh squeezed and has a shelf life of 55 days. It takes 2
weeks (14 days) to replace the orange juice inventory once an order is placed with the
orange juice supplier.
Questions As the supply chain analyst for the orange juice, what are the key factors to consider in
this situation?
At 49 Days of Supply, we are at risk of orange juice going past its shelf life. Once past its
shelf life, we cannot sell it. We will end up distress selling orange juice for a loss, and/or
dumping orange juice down the drain. It only takes 14 days to receive orange juice once
ordered from our supplier.
What actions will you recommend that your firm take regarding orange juice inventory
levels?
I would recommend reducing the inventory to between 14 – 21 Days of Supply, as it
takes only 14 days to receive orange juice from our supplier once ordered. That allows
for between (55 – 21)=34 and (55 – 14)=41 additional days for orange juice to move
through our inventory should demand for orange juice drop off slightly. The risk of
orange juice hitting its shelf life is very low with 14 – 21 Days of Supply. It also allows
sufficient time to receive orange juice from our supply should demand pick up.
Conestoga College Supply Chain
Inventory Management- Days of Supply
Teacher Notes
Summary Questions – (Have the students work in pairs to answer the Summary Questions then
take up the answers together in class.)
1. Explain the objective of inventory management.
“The World of Business” inventory management is defined as, “Balancing product
quantity with sales; having merchandise when it is needed and not having merchandise
when it is no longer needed.”(Glossary, p. 502)
2. Explain how the calculated ‘Days of Supply’ helps us to manage inventory levels better.
We want to hold the right amount of inventory to support sales. Too much inventory
and we could get stuck with inventory we can’t sell. Too little inventory means lost
sales. Both situations impact Net Profit. So, ‘Days of Supply’ helps us know how many
days of sales we are holding in inventory to help us better balance inventory with sales.
3. What other information is needed in addition to Days of Supply when managing inventory
levels?
Shelf life, and replacement time from our suppliers once we place an order with them.
4. Explain how inventory management impacts cash flow.
Inventory is Cash tied up not generating sales for us. The only way Cash comes into the
firm is by a sale. So, if Days of Supply is 49 days, we are tying up Cash inside the
company for an average of 49 days until the product is sold. A firm pays its bills with
Cash on hand. The longer it takes to convert inventory into a sale, the lower the firms
Cash on hand is. If a firm can’t pay its bills because of a lack of Cash it is teetering on
becoming bankrupt.
If you have any questions or would like further information please contact Brian Watson
[email protected] or Tracey Lopers [email protected]
Additional Resources for Supply Chain
APICS- APICS is the premier professional association for supply chain and operations management.
www.apics.org
CSCSC- Canadian Supply Chain Sector Council- http://www.supplychaincanada.org/en/
SCMA- Supply Chain Management Association- http://www.scmao.ca/
Conestoga College Supply Chain
Inventory Management- Days of Supply
Teacher Notes
Inventory Management- Days of Supply-Student Notes
Effectively managing inventories is important for any organization; whether it is retail,
manufacturing, transportation and distribution, or service like a doctor’s office. In the textbook
“The World of Business” inventory management is defined as, “Balancing product quantity with
sales; having merchandise when it is needed and not having merchandise when it is no longer
needed.”(Glossary, p. 502) Holding inventory costs money, and a business makes money only
when it sells that inventory. On the other hand, when inventory is not available, customers are
not always willing to wait and may go to another business, resulting in a lost sale. The question
becomes, what is the right amount of inventory to hold in your company?
There are many tools available to a skilled supply chain analyst to help make this decision. One
of the key tools used in this determination is a calculation known as the ‘Days of Supply’. ‘Days
of Supply’ is the measurement of the number of days of average sales you are holding in
inventory. The formula for calculating days of supply is;
Days of Supply = Inventory amount on hand / Average daily sales
Why is this measure important?
Our information regarding sales is very accurate today. However, the farther into the future we
look, the less accurate our picture becomes regarding future sales. So, if future demand for an
inventory item falls off and we are holding too many days of inventory, our firm could be stuck
with product we can’t sell. This is particularly critical for products with a limited shelf life.
Conversely, if future demand for a product rises and we are holding too few days of inventory,
we could run out of stock and lose sales.
1. What causes demand for an item to change?
_____________________________________________________________________________
______________________________________________________________________________
2. What are some implications of our firm being stuck with product we can’t sell?
_____________________________________________________________________________
______________________________________________________________________________
3. What are some implications of running out of stock?
_____________________________________________________________________________
______________________________________________________________________________
Conestoga College Supply Chain
Inventory Management- Days of Supply
Student Notes
As a result, ‘Days of Supply’ is an important measure for a supply chain analyst. Its real value
becomes clear when we consider the amount of time it takes our firm to replenish inventory
following a sale.
1. a) On April 1, a company has 1500 bags of topsoil on hand, with average daily sales of 800
bags per day. Calculate the days of supply for the bags of topsoil.
It takes seven days to replace our topsoil inventory once we place an order with our topsoil
supplier. Top soil has an unlimited shelf life.
b) As the supply chain analyst for the top soil, what are the key factors to consider in this
situation?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
c) What actions will you recommend that your firm take regarding top soil inventory levels?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. a) A Waterloo company sells Florida orange juice. The firm has 280 cases in inventory, and
sells 40 cases of orange juice per week. Calculate the days of supply for the orange juice.
The orange juice the firm sells is fresh squeezed and has a shelf life of 55 days. It takes 2
weeks (14 days) to replace the orange juice inventory once an order is placed with the
orange juice supplier.
b) As the supply chain analyst for the orange juice, what are the key factors to consider in
this situation?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
c) What actions will you recommend that your firm take regarding orange juice inventory
levels?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Conestoga College Supply Chain
Inventory Management- Days of Supply
Student Notes
Summary Questions
1. Explain the objective of inventory management.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Explain how the calculated ‘Days of Supply’ helps us to manage inventory levels better.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. What other information is needed in addition to Days of Supply when managing inventory
levels?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. Explain how inventory management impacts Cash Flow.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Conestoga College Supply Chain
Inventory Management- Days of Supply
Student Notes