Cash Conversion Cycle (CCC) measures ongoing liquidity from the firm’s operation is defined as a more comprehensive measure of working capital and as a supplement to current ratio and quick ratio. CCC shows the time lag between expenditure for the purchases of raw materials and the collection of sales of finished goods. CCC is a measure of the efficiency of Working Capital Management as it indicates how quickly the current assets are converting into cash. CCC comprises three components of days inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO); Cash Conversion Cycle (CCC) = Days Inventory Outstanding (DIO) + [Days Sales Outstanding (DSO) -Days Payables Outstanding (DPO)] Days Inventory Outstanding (DIO) is a key figure that measures the average amount of time that a firm holds its inventory. It is calculated by inventory/cost of sales x 365 days. A decrease in the DIO represents an improvement, Continue reading
Inventory Management Concepts
Safety Stock Analysis in Inventory Management
In real life situations one rarely comes across inventory lead times and usage rates that are known with certainty. When usage rate and/or lead time vary, then the reorder level should naturally be at a level high enough to cater to the production needs during the procurement period and also to provide some measures of safety for at least partially neutralizing the degree of uncertainty. The question will naturally arise as to the magnitude of safety stock. There is no specific answer to this question. However, it depends, inter alia, upon the degree of uncertainty surrounding the usage rate and lead time. It is possible to a certain extent to quantify the values that usage rate and lead time can take along with the corresponding chances of occurrence, known as probabilities. These probabilities can be ascertained based on previous experiences and/or the judgemental ability of astute executives. Based on the Continue reading