Management Information System – Understanding Information Systems
Introduction In today’s information and communication age, there is a constant reference to information systems and management of information systems. In the digital age data, storage and retrieval are done through various systems and interfaces. Information System An information system, therefore, can be defined as set of coordinated network of components which act together towards […]
Tips for Writing Effective Problem and Goals Statement
Although the Six Sigma process has tried to make the process of developing problem and goal statements into a science, however in reality it still remains an art. This combined with the fact that goal and problem statements go a long way into the execution of the project make it important to understand what are […]
Inventory Migration – Meaning, its need and importance
The need for Inventory Migration from one warehouse to another warehouse does not come about very often in Supply Chain Operations. However, sometimes the business demands necessitate a change of warehousing location, setting up a new location or even a change of business model. The occasion and need for an inventory migration can come about […]
Effects of FIFA World Cup on the Economy
The FIFA World Cup is an international sporting event. This event is held every four years. However, the host country changes every time. Countries have to bid against each other in order to win the rights to host the next World Cup. Many economists have questioned this practice. However, none have been able to find […]
International Payment Systems
Brief Introduction about International Payments If you have shopped online on international portals or have received payments from abroad, you would have wondered about how the payments flow across the world and which banks and financial institutions underpin global commerce and trade. Further, if you work in a corporate that has global supply chains with […]
Every business organization that is engaged in manufacturing, trading or dealing with salable products holds inventories in one form another.
Inventory is held in the form of raw materials or in the form of salable goods.
Since every unit of inventoried item has an economic value and is itemized in the books of account of the company, inventory can be considered to be an asset of the company.
Inventory Management is a critical function performed by planners to balance the inventory holding so as to ensure that optimum inventory levels are maintained. Any excess inventory will result in incremental costs of maintaining inventory and affects the financials of the company as it blocks working capital.
Under inventory on the other hand can seriously hamper the market share. Any customer order that is not fulfilled due to a stock out is not at all a good sign. Therefore the responsibility of striking a fine balance in holding lean inventory calls for smart planning and continuous monitoring of the inventory levels coupled with quick decision-making.
Due to the above factors all organizations generally tend to avoid holding inventories except at certain times.
It has been noticed that inventory build up in process and manufacturing industries is often a sign of hidden problems, which lie underneath and are not visible at the surface level. In other words one can say that to cover up inefficiencies in the internal systems, people build up inventories as safety stocks.
Stock build up can occur as a solution to cover up supplier inefficiencies. If the vendors are not reliable and the flow of raw materials cannot be ensured, there results a trend to hold buffer inventories in the form of raw materials or semi manufactured Work in Process inventories.
In other cases inventory build up can happen due to bad quality. The inventory cost increase and resultant inventory storage cost can be attributed to cost of quality.
If the production is not consistent with quality, the goods produced will get rejected leading to an increase in rejected inventory.
Secondly, to make up for the loss due to quality rejection, one would have to increase production and hold finished goods inventory.
In other cases production delays can lead to build up of inventories too. Production delays can be attributed to varied reasons such as bad design of the product, production layout inefficiencies, production stoppage due to breakdowns, Lengthy process times etc. Besides these causes, there could be many other problems related to people and management resulting in slackness on the shop floor, which can add to inventory holding at various stages.
Such inventory build-ups not only block the working capital and increase un necessary cost of maintaining and storing the inventories, but also hide the problems which can cause serious threat to the business. Management should be watchful to identify any such inventory buildups and investigate into the root cause and solve such problems.
An inventory build up at the raw material side as well as the finished goods side gives cause for worry to the finance controllers. Any non moving inventory is a cause for concern because it not only blocks up the funds of the organization but the incremental cost of holding the inventory keeps increasing over a period of time and effect the bottom line figures.
More importantly inventory over a period of time is susceptible to loss, theft, pilferage and shrinkage. It can also become obsolete and deteriorate over a period of time if not used within the shelf life.
Hence inventory levels are always on the radar of not only finance controllers, but of the top management as well.
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February 12, 2025
