Why the Global Economy is Creaking to a Halt despite Monetary Stimulus
Why Printing Money is Leading us Nowhere We discussed how central banks around the world are printing money and pumping in liquidity into the global economy. This has the result of creating asset bubbles and equity bubbles wherein the hot money flows into real estate and stock markets leading to speculative frenzies instead of real […]
Communications Driven and Group Decision Support System
Globalization has not only expanded the product markets. It has also made organizations geographically more dispersed. Therefore, the way the business is done and decisions are made has also changed significantly. Collaborative decision-making has become more valuable than ever. This is why there is an increased emphasis on developing and implementing communications-driven group decision support […]
Information System in Retail Sector
Introduction An important element of the supply chain is the retail. Retail is the place where the products and goods are sold to the end users. Retailer purchases goods and products from producers in large quantities and in turn sells them to consumers in smaller quantities. Information Flow It is very important for the retailer […]
Why there are Fewer Women in the Workforce and what can be done to rectify this
The Benefits of Having More Women in the Workforce As most organisational and business experts agree, there is a business case to be made for Diversity and Inclusivity in terms of the enrichment of organisations where there are greater number of women and gender and racial minorities. Right from the variety of opinions that diversity […]
Crackdown on Indian Credit Rating Firms
Credit rating industries are part of a closely held industry. For years, this has worked in favor of these agencies since they have to face less competition. However, these agencies are also the first ones to get blamed after every financial crisis. It is a known fact that no one can really predict a market […]
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.
Your email address will not be published. Required fields are marked *
Types of Inventories – Independent and Dependant Demand Inventories
February 12, 2025
