Chapter 6 Inventories 281digital entertainment technologies, products, and services to the motion picture, con-
sumer electronics, and professional audio industries. In the notes to its recent financial
statements, Digital Theater reported the following write-downs of its monochrome
projector inventory:Inventories are stated at the lower of cost or market. Cost is determined using the first-
in, first-out method. The Company evaluates its ending inventories for estimated
excess quantities and obsolescence. The Company’s evaluation includes the analysis of
future sales demand by product, within specific time horizons. Inventories in excess of
projected future demand are written down to net realizable value. In addition, the Com-
pany assesses the impact of changing technology on inventory balances and writes
down inventories that are considered obsolete. The Company recorded an inventory
write-down of $3,871 (thousands) related to its monochrome projector inventory dur-
ing the year ended December 31, 2004 due to declines in future demand and techno-
logical obsolescence.QUICK RESPONSE
To satisfy consumer demand, with the least amount of inventory and inefficiency, mer-
chandisers and manufacturers are embracing quick responseorefficient consumer re-
sponsestrategies. Quick response is used to optimize inventory levels by electronically
sharing common forecast, inventory, sales, and payment information between manu-
facturers and merchandisers, using the Internet or other electronic means. Using quick
response, a merchandiser electronically transmits daily sales information to the
manufacturer. The manufacturer uses this sales information to ship replacement stock
to the merchandiser, usually within days of receiving the sales information. Shared
forecasts are used to help the manufacturer plan for sales promotions or other seasonal
factors that may require more or less goods than the replaced amounts. For example,
VF Corporation, the manufacturer of Wrangler®jeans, reduced its inventory and
increased sales by entering into a quick response program with Federated Department
Stores(Bloomingdale’s, Macy’s). Under this program, VF receives sales information
from Federated cash register scanners in the morning and ships goods directly to the
retail store within 24 hours.
Prior to the quick response program, VF took about 30 days to deliver product to
the selling floor after an order was received. Both VF and Federated saw significant
improvements from the quick response strategy. VF estimated that jean sales improved
by 40% as a result of having the right colors and sizes on Federated’s shelves, while
Federated eliminated over $100 million in inefficient paperwork by using electronic or-
dering. Both firms saw significant reduction in inventories.
Throughout the last two decades, inventory management techniques, such as
quick response, have reduced the relative size of inventory by 35% for U.S. firms.^3
This has caused the economy to respond more quickly to changes in consumer de-
mand and to be less wasteful in inventory costs. Managing inventory efficiently re-
quires that the amount of inventory be known at all times. Accountants provide this
information to managers to help guide inventory policy, so that the costs identified
above are minimized.International Perspective
In Japan, inventories are
generally valued at cost
rather than lower of cost
or net realizable value.
Describe how inventories
are being reduced through
quick response.
8
3 Bernard DeGrove and Kevin Mellyn, “The Argument for Financial-Chain Management,” eCFO,
December 2000.