Inventory Proposal 1

Inventory Proposal University of Phoenix QRB/501: Quantitative Reasoning for Business Group: PA10MBA08 Sergio Perez, MISM, MBA March 29, 2011 Workshop 2

Inventory Proposal 2 Introduction One of the common causes of company decline can be attributed to inventory mismanagement. The maintenance of an inventory levels can be the key to the companys ability to manage its cash flow and profit margins. Successful managers will likely use key ratios to identify inventory problems. Turnover ratio which is calculated by dividing the cost of goods sold by the average inventory balance and number of days inventory on hand which is derived by dividing total inventory by the average days sales are two of the most common ways to measure inventory productivity. Businesses with inventories that fluctuate significantly over the course of the year present problems that motivate the company to implement a solution. High or low volume of inventories, excessive markdowns, slow inventory turnover, and slow cash flow are challenges for today's retailers with seasonal demands. In many cases, the problem begins before the season start with inaccurate plans which are preventable. To measure the seasonal pattern, accuracy is needed to avoid errors in forecast and decisions made on the basis of the forecasts (Virtual Advisor, 2009). Patterns that occur for each period of the year are important element in the decision making process regarding the inventory plan and control. Business need plans on a timely basis to protect themselves against be out of stock in the peak of the season, or over stock in slow months. The goal of forecasting is to be as accurate as possible. Forecasting is a tool used to predict future activity based upon past activity. Various approaches are chosen for forecasting. One of the most frequently used approaches is using timeseries data to predict future values. According to Singh and Das in a bNet article Forecasting Passenger Movement, particular attention to exploring the historic trends and patterns of the

Inventory Proposal 3 time-series involved and to predict the future of this series based on trends and patterns identified in the model. (bNet, 2010). It is often difficult for most managers to judge the quality of the forecasts that are presented to them. Therefore, they must focus on ensuring that the appropriate forecasting process has been used to produce accurate results. By constant examination and improvement of the forecasting process, the successful manager can usually count on a reduction of unnecessary costs due to problems with inventory. (Principles of Forecasting, 2001). Freshpoint FreshPoint Southern California, Inc. (FreshPoint) is an operating company of Sysco Foods, Inc. and is the largest fresh produce distributor in Southern California. FreshPoint purchases produce and other items from small to large vendors as well as local farmers and resells the inventory, usually at a mark-up, to its customers. According to Warren, Reeve, & Fess, Inventory is used to indicate (1) merchandise held for sale in the normal course of business and (2) materials in the process of production or held for production. (pg. 344) There are two types of inventory systems, the Perpetual and Periodic. The Perpetual inventory system reflects the day to day changes in inventory and the Periodic system is updated when at scheduled inventory counts. In order to ensure the accuracy of the inventory, there are several internal control measures that are used. First, the purchasing department tracks the balances of the items purchased to make a predetermination as to when the product should be ordered to fulfill pending or upcoming orders. When the purchaser/buyer places the order, a Purchase Order (PO) is created in the computerized inventory system. When the product is received, a Receiving

Inventory Proposal 4 Purchase Order (Receiving PO) is printed out and the Receiver matches up what is received to what was ordered to make sure that the two agree. If there is a discrepancy, the purchaser/buyer is notified immediately to investigate the matter. The inventory clerk then receives the PO in changing the status from ordered to on-hand The PO, Receiving PO, Passing/bill of lading/or other documentation received from the delivery company, and invoice if available, are then sent up to A/P for payment. The A/P associate verifies that the price FreshPoint is being billed is the same price on the original PO that the purchaser/buyer agreed to pay for the product. The price that FreshPoint purchases the product for is, in most cases, is marked up when billing the customer to show a margin of profit. Another internal control over FreshPoints inventory is the fact that the company does not allow product to be taken out of the building without an invoice being generated, taking the product out of inventory so that the perpetual inventory system is always as accurate as possible. Because FreshPoint deals which a large inventory, the organization also does weekly physical inventory counts to make sure that the inventory on hand agrees to what the computerized inventory system shows. A small loss is written off against the shortage account, while a large loss would be reported to the VP of Finance immediately and researched. FreshPoint uses the average cost method for tracking inventory. This means that there when an item is billed out the profit margin that is reflected is the total dollar amount of that item divided by the quantity on hand. Finally, Freshpoint uses FOB destination meaning that inventory is recorded when it is actually received and not when it is in transit to the company. This helps maintain more accurate records when taking physical inventory because the counters do not have to worry about product that is not physically in sight. Correlation analysis

Inventory Proposal 5 A correlation analysis shows the extent to which two variables associate one with the other while illustrating the strength and direction of the relationship. An example of this is shown in how foreclosure rate data is associated with home loan mortgage defaults. Additionally, one may also wish to discover whether there are positive or negative correlations present. In this instance, if one assumes that higher produce sales would result in the need to increase product inventory, this could be called a positive correlation because the correlations relate to each other. If the opposite were to occur, then there would be a declension in association. Therefore, a negative correlation would occur because the two variables do not relate to each other Sevilla, A. &Somers, K., 2007. In the case of the Team B paper, a correlation analysis is used for research purposes to investigate the details of how Freshpoints inventory systems are used to forces ast future inventories. Based on the current economy where banking and other financial institutions monitor the state of our current recession, this is especially important research. The evidence provided with this research is an important business tool to use towards Freshpoints insuring they stay a market leader in supplying fresh produce to their customers. The correlation analysis may be correct in demonstrating an association between higher produce sales is directly related to higher inventory, but the reason may be misplaced. Sometimes, in fact, the reason may be concealed and be an underlying one that is different to that studied. Many different factors can influence both of these factors and a direct positive correlation is possible one year, and a negative one the following which we will shown in the analysis of data. Other possible reasons for this could be theft of produce, inadequate inventory processes and supervision. Regressions Analyses

Inventory Proposal 6 The purpose of a regression analysis is to evaluate the relationship between variables. It can more readily and reliably predict causal relationships between one variable and another than correlation analysis can, and is, therefore, more often used for prediction and forecasting (Lial, M., Hestwood, D., Hornsby, J., & McGinnis, T., 2010). Our Freshpoint Inventory Data is used it in measuring whether the current inventory is sufficient to meet future demand. The analysis of this data allows us to predict future inventories and an looking at the inventory system allows us an opportunity to look at improving process and insuring our customer needs are meet. This comparison can be used to help Fresgpoint continuously monitor where we are in their current and future recovery processes, what types of produce should they be offering and if their programs are helping in insuring they have the most cost effective and efficient inventory system that creates the greatest profit for their Freshpoint.. The independent variable refers to the factor that is being assessed e.g. inventory. The dependent variable refers to the factor that hinges on the manipulation of the independent variable, for example factors that can affect inventories like losses due to spoilage or theft. Regression analysis is in order to forecast or predict eventualities and possibilities. For instance, one can use regression analysis to predict future produce costs based on past seasonal sales over the last five years. This is done by evaluating one variable (the dependent) against one or more variables (i.e. independent). Linear regression does not always allow us to better estimate trends, but its estimating power is better than that of other estimating procedures. Through drawing a best line fit through the data, linear regression minimizes the sum of squared errors. Data trends are spotted; a line is drawn through them; and this is considered a good fit of the data. Linear regression, accordingly, minimizes error, and provides consistent basis whilst

Inventory Proposal 7 providing a single slope or tend in an objective manner. Linear regression is the best estimation instrument for use in complex situations.

Inventory Proposal 8 References bNet.com (2011). Forecasting Passenger Movement in Lufthansa Airlines: A supply chain perspective. Retrieved March 13, 2011 from http://findarticles.com/p/articles/mi_7629/is_201010/ai_n56229565/ eNotes.com (2011). Define Forecasting. Retrieved March 13, 2011 from http://www.enotes.com/management-encyclopedia/forecasting Lial, M., Hestwood, D., Hornsby, J., and McGinnis, T. (2010). Prealgebra & Introductory Algebra (3rd ed.). Boston, MA: Pearson/Addison-Wesley Mindspring (2010). Fix Inventory Problems. Retrieved March 26, 2011 from http://www.michaelgoldman.com/inventory_management.htm Principles of Forecasting (2001). A Handbook for Researchers and Practitioners. Retrieved March 26, 2011 from http://marketing.wharton.upenn.edu/documents/research/PoF-tds %20and%20practices.pdf Virtual Advisor. (2009). Conduct a Sales Forecast. Retrieved March 26, 2011 from http://www.va-interactive.com/inbusiness/editorial/sales/ibt/sales_fo.html Sevilla, A. and Somers, K. (2007). Quantitative reasoning: Tools for Todays Informed Citizen (1st ed.). Emeryville, CA: Key College Publishing