Global Economy – Meaning and its Salient Aspects
The other modules discuss the phenomenon of globalization and the ongoing global economic crisis among other topics. This module is intended to discuss the salient aspects of the global economy including the structural features and the way in which several competing trends and factors influence the workings of the global economy. For instance, the global […]
What is Project Management?
A project in any organization is collaboration across departments to achieve a single well defined objective. The process of planning, organizing and managing resources to achieve the organizational objective is called project management. Project management is very important in production of goods and services. Idea generation to final production of product or service, each step […]
Step 3A: Choosing the Correct Control Chart (Discrete Data)
If the data type that needs to be charted is discrete, then it must fall between one of binary or count types. As the name suggests in case of binary distribution, there are only two possibilities, success and failure, defective and not defective, whereas in the case of count type distribution there may be more […]
Do Emerging Markets Represent the New Frontier for Globalization ?
Ever since the onset of the global economic crisis, there has been much talk about how globalization has reached its nadir and that the concept of an integrated global economy leading to prosperity has been discredited. The reason for this cynicism was that many commentators blamed globalization for causing the global economic crisis and plunging […]
The Need for Operational Definitions of Metrics
While coming up with operational metrics one must not forget to begin by first clarifying and defining what they mean. This is because there is a good chance that there may be ambiguity regarding what the metric really means. To better understand how to come up with operational definitions, the following procedure must be followed. […]
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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Types of Inventories – Independent and Dependant Demand Inventories
February 12, 2025
