A Brief Discussion on "Inventory"
Inventory, this concept is like a double-edged sword, making people both love and hate it. The saying "With food in the house, one won't feel anxious" reflects the typical petty - farmer mentality or the thinking of the farming era. However, in the modern business environment, if inventory is not a general equivalent and cannot be immediately converted into other needed things, then inventory may not be a good thing. Especially when the unit price of inventory items gradually decreases and additional management fees need to be paid, its drawbacks become even more obvious. Besides the value of the items themselves, inventory also incurs certain costs and makes enterprises bear many risks. Next, we will focus on the inventory situation of production - type factories.
The origin of inventory
The sources of inventory mainly come from three aspects. First, there is uncertainty in the market. To ensure the timeliness of sales, enterprises will prepare more inventory. Market demand is unpredictable, and factors such as consumers' preferences and the economic situation may lead to demand fluctuations. To avoid missing sales opportunities due to out - of - stock situations, enterprises can only increase inventory to cope with them. Second, the lack of precise control over the production process will result in unnecessary intermediate inventory. In the production process, if the connection between various links is not smooth and the production progress is not properly controlled, it will cause the backlog of semi - finished products and form intermediate inventory. Finally, from a conventional perspective, enterprises conduct bulk purchases to reduce the unit purchase price, or some materials have a minimum order quantity requirement, which also leads to the generation of inventory. Bulk purchases can reduce costs to a certain extent, but they will also increase inventory.
Classification of inventory
As can be seen from the sources of inventory, the inventory in factories is generally divided into three categories. I. Raw material inventory, which refers to various raw materials that enterprises reserve for production. II. Work - in - process (WIP), also known as intermediate inventory, including semi - finished products in each process and those in intermediate warehouses. III. Finished product inventory, which are products that have completed production and are waiting to be sold. Usually, the first and third categories of inventory account for a relatively large proportion. The total amount of these two types of inventory is often quite substantial, ranging from several weeks' worth to several months' worth, and they are prone to becoming stagnant or losing value. For example, raw materials that exceed the shelf - life need to be scrapped according to regulations. The longer the finished product inventory is stored, the greater the risk that customers no longer need it, and its value will also decrease accordingly.
The impact of inventory
Advantages of inventory
The advantages of inventory are relatively easy to understand. It enables enterprises to respond to customer demands more quickly and maintain the continuity of production. Meanwhile, the requirements for management and production planning can be relatively more lenient. For example, if the unit of the production plan is set as a week or even a month, it means that the enterprise needs to prepare the raw materials required for a week's production. However, the focus of this article is not to discuss the advantages of inventory, but to pay attention to those easily overlooked problems brought by inventory.
Occupation of funds by inventory
Inventory can seriously affect the occupation of funds. When purchasing raw materials, in many cases, cash needs to be paid. Even if some payments can be deferred (such as payment after one month), most of the materials cannot be used up within one month. The paid-for materials are stored in the warehouse, forming inventory and occupying the company's funds. If the finished product inventory cannot be dispatched in time and is stored in the warehouse, funds are required to maintain storage, management, and space occupation. More importantly, these inventories cannot be immediately converted into cash and cannot form liquid funds. However, the company's production needs to continue, and raw materials still need to be purchased, which requires continuous investment of funds. Many companies have an annual turnover of only hundreds of millions, but their inventory is as high as tens of millions. For example, a textile company has an annual turnover of 600 million, but its inventory reaches 180 million.
Risks brought by inventory
Inventory can also pose uncertain risks such as product obsolescence. If a customer makes a temporary change to their requirements, the products may become unusable or need to be scrapped, which will cause losses to the company. Take the above-mentioned textile enterprise as an example. If it had not conducted a public listing and raised funds a few months ago, its capital chain might have snapped.
Problems masked by inventory
Inventory conceals many corporate problems. Under the strong "cover" of inventory, many problems become less obvious and are even overlooked by people. For example, when the defective product rate reaches 2% or 3%, enterprises will think it's okay as long as there is inventory, thus neglecting the improvement of the yield rate. Low production efficiency doesn't prompt urgent improvement because of inventory. A relatively low effective startup rate of production equipment is also not taken seriously due to inventory. Problems such as inaccurate sales forecasts, the lack of refined production plans, poor supplier management, slow progress in automation, poor management levels, and low employee quality are all put on hold because of the existence of inventory. These seemingly "unimportant" problems actually become invisible obstacles to the enterprise's progress.
The impact of inventory on capital turnover
The existence of inventory will seriously affect the capital turnover, invisibly prolonging the time length of cash flow. Taking Haier and Japan's Mitsubishi as examples, both enterprises have an annual output value of 100 billion. However, Haier's capital can only be turned over several times a year, while Mitsubishi can turn it over once in a few days, nearly a hundred times a year. If the single - time profit margin is 5% for both, Haier's annual profit margin is only from over ten percent to twenty percent, while Mitsubishi can reach several hundred percent. Moreover, Mitsubishi uses much less cash each time than Haier. If the single - time profit margin is 1%, Mitsubishi can still survive, while it will be difficult for Haier to maintain, because the bank interest rate is several percent. This is also an important reason why American automobile companies are at a disadvantage when competing with Japanese automobile companies.
The impact of inventory on financial costs and risks
Since inventory ties up funds, enterprises need more funds to meet customer needs and achieve growth. This will not only increase financial costs, including costs related to fund management, cash inflows and outflows, and bank interest rates, but also expose enterprises to greater risks. Meanwhile, inventory leads to an increase in cash outflows and a contraction in cash inflows. Although the amount of cash has increased, the cash flow has not improved.
Discussion on the solution to inventory problems
Refined management is a good direction to solve the inventory problem. Enterprises with the conditions can consider implementing lean production. There are two specific entry points. One is to start from the production plan and then extend to both ends. First, enterprises need to formulate refined-level plans, at least accurate to the day, and even to the hour. Then, extend upstream for refined supplier management and downstream for order management. The other direction is to start from the order, covering the entire process from receiving the order to planning, the production process, and finally to the completion of the order and shipment. No matter which direction is chosen, several problems need to be solved first, especially the enterprise's operation mode. If the operation mode is not changed, as the enterprise scales up, inventory control will become increasingly difficult, the difficulty and cost of change will also increase, and at the same time, risks will rise. Both directions should revolve around two key points, namely, the information flow and the physical flow (some people also call it the logistics).
Note: The orders mentioned in this article are the purchase orders (Purchase Order) provided by the customer.