Working Capital
CA CL
An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. It measures how much in liquid assets a company has available to build its business.
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referred to as working capital management. Short term financial management concerned with decisions regarding to CA and CL.
Management of Working capital refers to management of CA as well as
CL.
If current assets are less than current liabilities, an entity has a working
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The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
as a result of intensified competition on globalised markets. When trying to attain greater efficiency, it is important not to focus exclusively on income and expense items, but to also take into account the capital structure, whose improvement can free up valuable financial resources
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of sales and they donot convert into cash instantly, thus there is a need for working capital in the form of CA so as to deal with the problem arising from lack of immediate realisation of cash against goods sold. This is referred to as Operating or Cash Cycle . It is defined as The continuing flow from cash to suppliers, to inventory , to accounts receivable & back into cash . 10/10/12
cash or operating cycle of a firm. Which refers to length of time required to complete the sequence of events. Thus operating cycle creates the need for working capital & its length in terms of time span required to complete the cycle is the major determinant of the firms working capital needs.
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On the basis of time PERMANENT WORKING CAPITAL VARIABLE WORKING CAPITAL On the basis of concept Gross Working Capital Net working Capital
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Permanent Working Capital Time Permanent and temporary working capital for Stable firm
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into cash within an accounting year & include cash , debtors etc.
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suggests the extent to which working capital needs may be financed by permanent sources of funds.
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CURRENT ASSETS Inventory Sundry Debtors Cash and Bank Balances Advances
CURRENT LIABILITIES Sundry creditors Short term loans Provisions Outstanding Expenses
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General nature of business Production cycle Business cycle Credit policy Production policy Growth and expansion Operating efficiency
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Low Levels
Cost: Shortages Dissatisfied customers Benefit: Low storage costs Less risk of obsolescence
Cash
High Levels
Benefit: Reduces risk Cost: Increases financing costs
Low Levels
Benefit: Reduces financing costs Cost: Increases risk
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1414
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1515
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...begins with acquisition of raw materials and ends with collection of receivables.
Raw Materials WIP
Cash
Finished Goods
Debtors
SALES
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OPERATING CYCLE
Stages: 1) Raw materials (RM/RM consumption) 2) Work-in-process (WIP/COP) 3) Finished Goods (FG/COS) 4) Receivables (Debtors/Credit sales) Less: Creditors (creditors/purchases)
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OCP = R+ WIP + F + D C R = Average Stock of Raw Materials Daily Average Consumption Average Stock of WIP Daily Average Factory Cost Average Finished Goods Cost of good sold /365 Average Account Receivable/Debtors Total Credit Sales/365 Average Account Payable/Creditors Total Credit Sales/365
WIP= F D C = = =
Opening + Purchases Opening WIP + Closing Material , labor, Opening FG + Overheads Factory Cost Closing WIP Closing FG
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FORECASTING / ESTIMATION OF WORKING CAPITAL REQUIREMENTS PROFORMA 1. TRADING CONCERN ESTIMATES - WORKING CAPTIAL
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.) Current Assets (i) Cash (ii) Receivables ( For..Months Sales)---(iii) Stocks ( ForMonths Sales)----(iv)Advance Payments if any Less : Current Liabilities (i) Creditors (For.. Months Purchases)(ii) Lag in payment of expenses WORKING CAPITAL ( CA CL ) Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED
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xxx xxx
1. MANUFACTURING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Stock of R M( for .months consumption) (ii)Work-in-progress (formonths) (a) Raw Materials (b) Direct Labour (c) Overheads ----(iii) Stock of Finished Goods ( for months sales) (a) Raw Materials (b) Direct Labour (c) Overheads ----(iv) Sundry Debtors ( for months sales) (a) Raw Materials (b) Direct Labour (c) Overheads ----(v) Payments in Advance (if any) (iv) Balance of Cash for daily expenses (vii)Any other item Less : Current Liabilities (i) Creditors (For.. Months Purchases) (ii) Lag in payment of expenses (iii) Any other WORKING CAPITAL ( CA CL )xxxx Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED --------------------------------------------------------XXX
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RM = holding Period
52/12/365 WIP = (R)= budgeted production * RM Cost /unit * Average WIP Period 52/12/365 (L)= budgeted production * Labor Cost /unit * Average WIP Period 52/12/365 (OH )= budgeted production * OH Cost /unit * Average WIP Period 52/12/365 F = (R)= budgeted production * RM Cost /unit * Average Finished goods Period 52/12/365 (L)= budgeted production * Labor Cost /unit * Average Finished goods Period 52/12/365 (OH )= budgeted production * OH Cost /unit * Average Finished goods Period 52/12/365 D = budgeted production * Total Cost/unit * Average Debtors collection Period 10/10/12 52/12/365
Temporary Current Assets Temporary current assets are an increase in current assets due to a temporary event. An example would be seasonal demand for a product. example, a toy manufacturer experiences a temporary increase in current assets around Christmas. An increase in temporary current assets will likely cause a need for short-term financing. Permanent Current Assets Permanent current assets are an increase in current assets due to a permanent increase in levels of accounts receivable and inventory levels. For example, if our toy manufacturer started selling toys to major toy retailer, they would experience a higher level of sales, resulting in a higher accounts receivable and the need for a new permanent level of inventory to meet demand from supplying the new retailer. To finance this increase in current assets the toy manufacturer should obtain long-term financing. The reason they would need long-term financing is the new level of current assets will be permanent (greater than one year). Because the firm has obtained longterm financing for their new permanent level of current assets, they will have more liquidity to meet the seasonal demand. If they obtained short-term financing, the company will likely find themselves short on cash when they need to increase inventory before Christmas.
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. AGGRESSIVEWORKINGCAPITALPOLICY; Lowlevel of investment in current assets Moreshorttermfinancingisusedtofinancecurrentassets . Supportlowlevel ofproduction&sales Borrowing short-term isconsideredmoreriskythanborrowinglongterm. Firmriskincreases,dueto the risk of fluctuatinginterestrates,butthepotentialfor higher 10/10/12 returnsincreasesbecauseof thegenerallylow-
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2. Conservative policy A large inventory is maintained under the conservative policy and therefore the return is lower than under an aggressive policy. In terms of risk and return, a moderate policy falls somewhere between the two extremes. Under a conservative working capital financing policy, the organizations non-current assets, permanent current assets as well as a part of the fluctuating current assets are financed with permanent financing (equity and long term debt). Therefore the conservative financing policy is the least risky policy but it gives lowest return to the company
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CONSERVATIVEWORKINGCAPITALPOLICY; high level of investment in current assets support any level of sales and production high liquidity level Avoid shortterm financing to reduce risk, but decreases the potential for maximum value creation because of the high cost of longterm debt and equity financing. Borrowing longterm is considered less risky than borrowing short-term. This approach involves the use of longterm debt and equity to finance all long-term fixed assets and permanent assets, in addition to some part of temporary current assets. The firm has a large amount of net working capital. It is a 10/10/12
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3. MODERATE WORKING CAPITAL POLICY This approach tries to balance risk and return concern s. Temporary current assets that are only going to be on the balance sheet for a short time should be financed with short-term debt, current liabilities. And, permanent current assets and long-term fixed assets that are going to be on the balance sheet for a long time should be financed from long-term debt and equity sources. The firm has a moderate amount of net working capital. It is a relatively amount of risk balanced by a relatively moderate amount of expected return. In 10/10/12
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RiskandReturnofCurrentLiabilities Thegoalof thereturnmanagementprocessis tomaximizeearningsin thecontextof anacceptablelevel of risk. Firm'sworkingcapitalis financedfromshort-termborrowing,longtermborrowing,equity financing, or somemixtureofallthree. Thechoiceof.thefirm'sworkingcapitalfin ancingdependsonmanager'sdesireforpr ofitversustheir degreeof riskaversion. 10/10/12 Thebalancebetweenthe.riskandreturnof
Impact on Liquidity
Optimal Amount (Level) of Current Assets Liquidity Analysis Policy Liquidity A High B Average C Low Greater current asset levels generate more liquidity; all other factors held constant.
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Impact on Risk
Optimal Amount (Level) of Current Assets
Decreasing cash
reduces the firms ability to meet its financial obligations. More risk! Stricter credit policies reduce receivables and possibly lose sales and customers. More risk! Lower inventory levels increase stockouts and lost sales. More risk!
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Impact on Risk
Optimal Amount (Level) of Current Assets Risk Analysis Policy Risk A Low B Average C High
Risk increases as the level of current assets are reduced.
0
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Unit-II
Click to edit Master subtitle style
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receivable and methods for controlling cash disbursements. Differentiate between remote and controlled disbursement, and discuss any ethical concerns raised by either of these two methods. Discuss how electronic data interchange (EDI) and outsourcing each relates to a companys cash collections and disbursements. Identify the key variables that should be considered before purchasing any marketable securities. Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment. Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why. 10/10/12
Securities
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Collection Float
Mail Floa t
Processing Float
Availabilit y Float
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Deposit Float Collection Float: total time between the mailing of the check by the customer and the availability of cash to the receiving firm.
Mail Float
Customer Firm mails receives check check Mail Float: time the check is in the mail.
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Processing Float
Firm Firm receives deposits check check Processing Float: time it takes a company to process the check internally.
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Availability Float
Firm Firms bank deposits account check credited Availability Float: time consumed in clearing the check through the banking system.
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Deposit Float
Processing Float
Availability Float
Deposit Float: time during which the check received by the firm remains uncollected funds.
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Earlier Billing
Accelerate preparation and mailing of invoices
computerized billing invoices included with shipment invoices are faxed advance payment requests
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Preauthorized Payments
Preauthorized debit The transfer of funds from a payors bank account on a specified date to the payees bank account; the transfer is initiated by the payee with the payors advance authorization.
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Lockbox Systems
A post office box maintained by a firms bank that is used as a receiving point for customer remittances. A collection service provided by a firms bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.
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Traditional Lockbox
Electronic Lockbox
Lockbox Process*
Customers are instructed to mail their
remittances to the lockbox location. Bank picks up remittances several times daily from the lockbox. Bank deposits remittances in the customers account and provides a deposit slip with a list of payments. Company receives the list and any additional mailed items.
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* Based on the traditional lockbox system
Lockbox System
Advantage
Receive remittances sooner which reduces processing float.
Disadvantage
Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.
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Concentration Banking
Cash Concentration
The movement of cash from lockbox or field banks into the firms central cash pool residing in a concentration bank. Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans.
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Compensating Balance
Concentration Banking
Net Float -- The dollar difference between the balance shown in a firms (or individuals) checkbook balance and the balance on the banks books.
You write a check today, which is subtracted from your calculation of the account balance. The check has not cleared, which creates float. You can potentially earn interest on money that you have spent.
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Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement 10/10/12 process.
Control of Disbursements
100 % 75 % 50 %
25 % 0 %
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F M after (Payday )
M and
estimate each disbursement account. Only need to forecast overall cash needs. 10/10/12
Controlled Disbursement -- A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis.
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Electronic Commerce
Electronic Commerce -- The exchange of business information in an electronic (non-paper) format, including over the Internet. 1. Unstructured -- utilize technologies such as faxes and e-mails 2. Structured -- utilize technologies such as electronic data interchange (EDI).
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electronic movements of information between two depository institutions resulting in a value (money) transfer.
EDI Subse t
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Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)
New Regulation
In January 1999, a new regulation requires ALL federal government payments be made electronically.* This will:
provide more security than paper checks and be cheaper to process for the government.
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Outsourcing
Outsourcing -- Subcontracting a certain business operation to an outside firm, instead of doing it in-house. Why might a firm outsource?*
1. Improving company focus 2. Reducing and controlling operating
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1.
Cash equivalents if maturities are less than three (3) months at the time of acquisition. 2. Short-term investments if remaining maturities are less than one (1) year.
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R $
Optimal balance of marketable securities held to take care of probable deficiencies in the firms cash account.
F $ C $
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R $
Marketable securities held for meeting controllable (knowable) outflows, such as taxes and
F $ C $
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R $
Free marketable securities (that is, available for as yet unassigned purposes).
Refers to the likelihood of getting back the same number of Amount you originally invested (principal).
Marketability (or Liquidity)
The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession.
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Treasury Bills (T-bills): Short-term, non-interest bearing obligations . Treasury issued at a discount and redeemed at maturity for full face value. Minimum 25 000 rsamount and multiples of 25000 rs.
BEY = [ (FA PP) / (PP) ] *[ 365 / DM ] FA: face amount of security PP: purchase price of security DM: days to maturity of security
A Rs 1,000, 13-week T-bill is purchased for = [ (1000 990) its BEY? BEY Rs. 990 what is / (990) ] *[ 365 /
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91 ] BEY = 4.05%
Repurchase Agreements (RPs; repos): Agreements to buy securities (usually Treasury bills) and resell them at a higher price at a later date. Bankers Acceptances (BAs): Short-
term promissory trade notes for which a bank (by having accepted them) promises to pay the holder the face amount at maturity. 10/10/12
Commercial Paper: Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument.
Money Market Preferred Stock: Preferred stock having a dividend rate that is reset at auction every 49 days.
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Negotiable Certificate of Deposit: A large-denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified period of time.
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Cash planning and forecasting Managing the cash flows Determining the optimum level
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8320A-83
How quickly and cheaply a organization How accurately managers can predict
(Cash Budget helpful)
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excess cash
Transaction cost of withdrawing cash and making an investment Demand for Cash for daily transactions
(Cash Budget helpful)
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8620A-86
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8720A-87
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8820A-88
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8920A-89
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9020A-90
expenditures over the next year. The interest rate is 4% and the fixed trading cost is Rs 25 per transaction.
What is the optimal cash balance? What is the average cash balance? What is the opportunity cost? What is the shortage cost? What is the total cost?
9120A-91
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determining the optimum cash balance (Z), the point at which to sell securities to raise cash (lower limit L) and when to invest excess cash by buying securities and lowering cash holdings (upper limit H).
Depends on:
transaction costs of buying or selling securities variability of daily cash (incorporates
Upper Limit
Buy Securities
Z
Lower Limit Sell Securities Days of the Month
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Z= 3
where: TC = transaction cost of buying or selling securities V = variance of daily cash flows r = daily return on short-term investments Z= spread between upper and lower limit
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3 TC x V 4 r
Return point = lower limit + spread 3 Upper limit = lower limit + spread
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9520A-95
Upper Limit
Buy Securities
10,0 00
400 0
Lower Limit
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100 0
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9720A-97
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9820A-98
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9920A-99
Unit -III
Accounts Receivable and Inventory Management
Click to edit Master subtitle style
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List the key factors that can be varied in a firm's credit policy and understand the trade-off between profitability and costs involved. Understand how the level of investment in accounts receivable is affected by the firm's credit policies. Critically evaluate proposed changes in credit policy, including changes in credit standards, credit period, and cash discount. Describe possible sources of information on credit applicants and how you might use the information to analyze a credit applicant. Identify the various types of inventories and discuss the advantages and disadvantages of increasing/decreasing inventories. Describe, explain, and illustrate the key concepts and calculations necessary for effective inventory management and control, including classification, economic order quantity (EOQ), order point, safety stock, and just-in-time (JIT).
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Credit Standards
Credit Standards -- The minimum quality of credit worthiness of a credit applicant that is acceptable to the firm. Why lower the firms credit standards?
The financial manager should continually lower the firms credit standards as long as profitability from the change exceeds the extra costs generated by the additional receivables.
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Credit Standards
Costs arising from relaxing credit standards
A larger credit department Additional clerical work Servicing additional accounts Bad-debt losses Opportunity costs
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Basket Wonders is not operating at full capacity and wants to determine if a relaxation of their credit standards will enhance profitability. The firm is currently producing a single product with variable costs of Rs.20 and selling price of Rs.25. Relaxing credit standards is not expected to affect current customer payment habits.
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average collection period for new accounts of 3 months is expected. The before-tax opportunity cost for each dollar of funds tied-up in additional receivables is 20%.
Ignoring any additional bad-debt losses that may arise, should Basket Wonders relax their credit standards?
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Investment in (Rs.20/Rs.25) x (Rs.30,000) = add. receivables Rs.24,000 Req. pre-tax return (20% opp. cost) x Rs.24,000 = on add. investment Rs.4,800
10/10/12 Yes!
Credit Terms
Credit Terms -- Specify the length of time over which credit is extended to a customer and the discount, if any, given for early payment. For example, 2/10, net 30. Credit Period -- The total length of time over which credit is extended to a customer to pay a bill. For example, net 30 requires full payment to the firm within 30 days from the invoice date.
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Basket Wonders is considering changing its credit period from net 30 (which has resulted in 12 A/R Turns per year) to net 60 (which is expected to result in 6 A/R Turns per year).
The firm is currently producing a single
product with variable costs of Rs.20 and a selling price of Rs.25. Additional annual credit sales of Rs.250,000 from new customers are forecasted, in addition to the current Rs.2 million in annual 10/10/12 credit sales.
Ignoring any additional bad-debt losses that may arise, should Basket Wonders relax their credit period?
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Investment in add. (Rs.20/Rs.25) x (Rs.41,667) = receivables (new sales) Rs.33,334 Previous (Rs.2,000,000 sales) / (12 Turns) = receivable level Rs.166,667
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Req. pre-tax return (20% opp. cost) x Rs.200,000 = on add. investment Rs.40,000
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Credit Terms
Cash Discount Period -- The period of time during which a cash discount can be taken for early payment. For example, 2/10 allows a cash discount in the first 10 days from the invoice date. Cash Discount -- A percent (%) reduction in sales or purchase price allowed for early payment of invoices. For example, 2/10 allows the customer to take a 2% cash discount during the cash discount period.
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expected to be maintained. The firm expects 30% of its credit customers (in dollar volume) to take the cash discount and thus increase A/R Turns to 8.
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Ignoring any additional bad-debt losses that may arise, should the competing firm introduce a cash discount?
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Yes!
The benefits derived from released accounts receivable exceed the costs of providing the discount to the firms customers.
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Seasonal Dating
Seasonal Dating -- Credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period.
Avoids carrying excess inventory and the associated carrying costs. Accept dating if warehousing costs plus the required return on investment in inventory exceeds the required return on additional receivables.
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Bad-Debt Losses
The firm should increase collection expenditures until the marginal reduction in bad-debt losses equals the marginal outlay to collect.
Saturatio n Point
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Collection Expenditures
the credit applicant Analyzing this information to determine the applicants creditworthiness Making the credit decision
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The company must weigh the amount of information needed versus the time and expense required.
Financial statements Credit ratings and reports Bank checking Trade checking Companys own experience
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Sources of Information
Credit Analysis
A credit analyst is likely to utilize information regarding:
the financial statements of the firm
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(ratio analysis) the character of the company the character of management the financial strength of the firm other individual issues specific to the firm
* For previous customers only a Dun & Bradstreet reference book check. 10/10/12
Accep t
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N o
Poor
Accept, only upon domestic irrevocable letter of credit ** That is, the credit of a bank is substituted for customers credit. (L/C)** 10/10/12
Accep t
Rejec t
Credit-scoring System -- A system used to decide whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness. Line of Credit -- A limit to the amount of credit extended to an account. Purchaser can buy on credit up to that limit. Streamlines the procedure for shipping goods.
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Outsourcing Credit and Collections The entire credit and/or collection function(s) are outsourced to a third-party company.
Credit decisions are made Ledger accounts maintained Payments processed Collections initiated
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per unit. Variable cost Rs. 6 per unit for the given level of 30000 units output. Fixed cost 60000 Rs. Average cost Rs 8 per unit , Average collection period 30 days.
average credit period will increase to 45 days , sales will increase by 15 % . required rate of return is 15 %
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Present Proposed Sales 300000 345000 less: VC 180000 207000 Contribution 120000 138000 less: Fixed Cost 60000 60000 Profit 60000 78000 Incremental Profit 18000 ( A) Total Cost 240000 267000 DTO Ratio 12 8 Average investment in 20000 33375 debtors Additional / Saving 13375 Cost Cost of Additional 13375 X .15 = 10/10/12 Investment / 2006.25
for payment with in 10 days then collection period dropped to 15 days sales will increase by 15 % and 60 % of total sales are on credit
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Present Proposed Sales 300000 345000 less: VC 180000 207000 Contribution 120000 138000 less: Fixed Cost 60000 60000 Profit 60000 78000 Incremental Profit 18000 ( A) Total Cost 240000 267000 DTO Ratio 12 24 Average investment in 20000 11125 debtors Additional / Saving 8875 Cost Cost of Additional 8875 X .15 = 10/10/12 Investment / 1331.25
days bad debts will increase from 1 % current level to 3 % and sales will increased by 15 %
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Present Proposed Sales 300000 345000 less: VC 180000 207000 Contribution 120000 138000 less: Fixed Cost 60000 60000 Profit 30000 78000 Incremental Profit 18000 ( A) Total Cost 240000 267000 DTO Ratio 8 4.8 Average investment in 30000 55625 debtors Additional / Saving 25625 Cost Cost of Additional 25625 X .15 = 10/10/12 Investment / 3843.75
Inventories form a link between production and sale of a product. Inventory types:
Raw-materials inventory Work-in-process inventory In-transit inventory Finished-goods inventory
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Compare the benefits of economies of production, purchasing, and product marketing against the cost of the additional investment in inventories.
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10 0 9 0 7 0
most frequently Review B and C items less rigorously and/or less frequently.
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A
10 30 100 Cumulative Percentage of Items in
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The quantity of an inventory item to order so that total inventory costs are minimized over the firms planning period. The EOQ or optimal quantity (Q*) is:
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Q* =
2 (O) (A) C
Basket Wonders is attempting to determine the economic order quantity for fabric used in the production of baskets.
10,000 yards of fabric were used at a
constant rate last period. Each order represents an ordering cost of Rs.200. Carrying costs are Rs.1 per yard over the 100-day planning period.
We will solve for the economic order quantity given that ordering costs are Rs.200 per order, total usage over the period was 10,000 units, and carrying costs are Rs.1 per yard (unit).
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Q* = Q* = 2,000
Q *
When to Order?
Issues to consider:
Lead Time -- The length of time between the placement of an order for an inventory item and when the item is received in inventory. Order Point -- The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Order Point (OP) = Lead time X Daily usage
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Lead time = 2 days Daily usage = 10,000 yards / 100 days = 100 yards per day Order Point = 2 days x 100 yards per day = 200 yards
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Lea d
18
20
38
40
DAYS
Safety Stock
Safety Stock -- Inventory stock held in reserve as a cushion against uncertain demand (or usage) and replenishment lead time. Our previous example assumed certain demand and lead time. When demand and/or lead time are uncertain, then the order point is: Order Point = (Avg. lead time x Avg. daily usage) + Safety stock
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22 00 20 00 UNITS
Ord er Poi 40 nt 0 20 0
0 38
Safety Stock
18 20
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DAYS
22 00 20 00 UNITS
Ord er Poi 40 nt 0 20 0
0
18
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DAYS
demand Amount of uncertainty in the lead time Cost of running out of inventory Cost of carrying inventory
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Just-in-Time
Just-in-Time -- An approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed. Requirements of applying this approach:
A very accurate production and
inventory information system Highly efficient purchasing Reliable suppliers Efficient inventory-handling 10/10/12 system
allows for many business-to-business (B2B) transactions Competition through B2B auctions helps reduce firm costs especially standardized items
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