Operations and Supply Chain Management The Core

GLOBAL SOURCING AND PROCUREMENT chapter 13 445
the firm valued at cost. It includes the raw material, work-in-process, finished goods, and
distribution inventory considered owned by the company.
Good inventory turnover values vary by industry and the type of products being handled.
At one extreme, a grocery store chain may turn inventory over 100 times per year.
Values of six to seven are typical for manufacturing firms.
In many situations, particularly when distribution inventory is dominant, weeks of
supply is the preferred measure. This is a measure of how many weeks’ worth of inventory
is in the system at a particular point in time. The calculation is as follows:
​Weeks of supply = ​ ​ ____________________________
Average aggregate inventory value
​ × 52 weeks​ [13.2]
( Cost of goods sold
​)
Weeks of supply
Preferred measure
of supply chain
efficiency that is
mathematically the
inverse of inventory
turn times 52.
When company financial reports cite inventory turnover and weeks of supply, we can assume
that the measures are being calculated firmwide. We show an example of this type of calculation
in the example that follows using Apple Computer data. These calculations, though,
can be done for individual entities within the organization. For example, we might be interested
in the production raw materials inventory turnover or the weeks of supply associated
with the warehousing operation of a firm. In these cases, the cost would be that associated
with the total amount of inventory that runs through the specific inventory. In some verylow-inventory
operations, days or even hours are a better unit of time for measuring supply.
A firm considers inventory an investment because the intent is for it to be used in the
future. Inventory ties up funds that could be used for other purposes, and a firm may have
to borrow money to finance the inventory investment. The objective is to have the proper
amount of inventory and to have it in the correct locations in the supply chain. Determining
the correct amount of inventory to have in each position requires a thorough analysis of the
supply chain coupled with the competitive priorities that define the market for the company’s
products.
Example 13.2: Inventory Turnover Calculation
Apple Computer reported the following information in a recent annual report (all dollar amounts are
expressed in millions):
Total revenue $229,234
Cost of revenue $141,048
Inventory $ 4,855
The cost of revenue corresponds to what we call cost of goods sold. One might think that U.S. companies,
at least, would use a common accounting terminology, but this is not true. The inventory
turnover calculation is
​Inventory turnover = _______ ​ 141,048 ​ = 29.05 turns per year​
4,855
This is amazing performance for a high-tech company, but it explains much of why the company is
such a financial success.
The corresponding weeks of supply calculation is
​Weeks of supply = ​ ​ _ 4,855
( 141,048 ​ ​ × 52 = 1.79 weeks ) •