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Inventory refers to items that are stored and owned for final sale or use. Inventory includes not only finished products stored and held before they are shipped and sold to customers, but also work-in-process and semi-finished products that are still being processed, as well as raw materials and parts used to produce products.
In manufacturing, there may be a strong impression that holding inventory is a bad thing, but holding inventory can guarantee production throughput and prevent stockouts, or create and store inventory in advance, keep production constant, and also prevent unnecessary overtime and stockouts. Underutilized.
Although inventory has a necessary role, why is it not good to say that there is too much inventory? This article will explain the problem of excess inventory and its causes.
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The problem of excess inventory
Inventory plays an important role in any business operation, ensuring the smooth flow of production and sales activities. However, the problem caused by the excess inventory should not be ignored. Here are seven problems that can lead to excess inventory that not only affect the financial health of your business, but can also hinder your long-term growth.
1.Decline in capital turnover:
The essence of inventory is that it is an asset that has not been converted into cash. Holding too much inventory means that a lot of money is trapped in items that cannot be liquidated immediately, which reduces the cash liquidity and capital turnover of the business. In addition,Excess inventory may also be considered a taxable item, increasing the tax burden on the business.
2.Increased interest burden:
If the business borrows money in order to buy inventory,Then as the amount of inventory increases, the interest that needs to be paid will also increase accordingly. This not only increases financial costs, but may also reduce the profit margins of the business.
3.Rising management costs:
Inventory holding and management requires a lot of work, including storage, transportation, inventory, etc. Not only does this additional work not create additional value, but it is possibleLeads to waste of manpower and time.
4.Waste of space:
Excess inventory takes up valuable storage spaceIn addition to the direct warehousing costs, there are also labor costs required to manage this inventory.
5.Increased energy costs:
The cost of energy required to store inventory, such as air conditioning, lighting, etc., increases as inventory increases. In addition,The cost of fuel required to transport inventory is also an expense that should not be overlooked.
6.Losses due to obsolescence of the product:
As storage lasts, the product may become obsolete and its value decreases. Products that are stored for a long time can end up as waste because they cannot be sold, resulting in huge financial losses, including the cost of disposing of this waste.
7.Hidden production issues:
Too much inventory can mask problems in the production process, such as inefficient production or product quality issues. If these problems are not discovered and solved in time, they may affect the production capacity and product quality of enterprises in the long run.
It is estimated that administrative costs typically account for about 25% of the total inventory, with labor costs accounting for about 10%. This means that, in addition to the direct cost of inventory, the cost of managing that inventory is also a significant expense. Therefore, effective inventory management is essential from a volume and cost management perspective.
It is very important for businesses to be aware of the various problems that can arise from excess inventory. Through fine management, enterprises can not only avoid the above problems, but also improve the efficiency of capital utilization, strengthen market competitiveness, and promote the healthy development of enterprises.
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Why is inventory increasing? Reasons for the increase in inventory
So why are inventories increasing? There are seven reasons for the increase in inventories:
Reason 1: The customer's requirements do not match the delivery time
If the procurement cycle or manufacturing cycle is long, it will be difficult to meet the needs of customers. We have to solve this problem by securing additional inventory, which leads to an increase in inventory.
Reason 2: Not as expected
Poor conditions, such as production schedules that are out of sync with the schedule, infrequent schedule revisions, and poor accuracy, can lead to an unexpected increase in inventory.
Reason 3: Mass production
If the batch itself is large, the number of materials and parts ordered will also be large. Naturally, the larger the manufacturing batch and the more product produced, the more likely it is that there will be a surplus of product inventory.
Reason 4: Low yield rate and low defect rate lead to overproduction
If the person in charge of the plan does not know the yield or defect rate, or does not make efforts to improve the yield or defect rate, the production order will exceed the order quantity, resulting in an increase in inventory.
Reason 5: Lack of standardization
If parts and products are not standardized, there will be various variations.
This results in holding a large amount of inventory to compensate for the change.
Reason 6: Overproduction, not reaching the target target
If there's no indicator to reduce inventory in the target metric, or there's no effort to reduce inventory, then you're not going to focus on inventory in the first place. If you carry out activities that emphasize utilization, productivity, profit and loss, etc., you may end up with overproduction, resulting in a significant increase in inventory.
Reason 7: Inventory peace of mind
If the inventory standard is not clear or appropriate, or the inventory status cannot be visualized, the workplace with a weak sense of inventory responsibility will often fall into the trap of "it is okay if there is no shortage of stock". This can also lead to excess inventory.
These are all reasons for the increase in inventory. There are many reasons for excess inventory, which involves multiple departments and makes it difficult to make improvements.
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Component shortage risk and inventory optimization
In the face of out-of-stock problems caused by chain disruptions, such as semiconductor shortages, companies often face a core question: should they choose to keep inventory levels low to manage the risk of stockouts, or should they maintain high inventories for any eventuality? While some sectors may gravitate towards the latter, relying solely on traditional methods of increasing inventory is not the best strategy to solve the chain challenge.
1.Manage normal and at-risk inventory
In the face of the uncertainty of the ** chain,Our recommended strategy is to make a clear distinction between "properly managed inventory" and "stock-out risk inventory".
Normally managed inventory should continue to use lean inventory management methods to maintain the lowest possible inventory levels for the lower risk parts of the chain. By improving the balance between the front and back processes of the production line and eliminating the capacity gap, we can effectively reduce the inventory demand.
Out-of-stock risk inventory, or "strategic inventory", is for specific items that are at risk of chain disruption. For this part of the inventory, we adopt a more active management strategy and maintain a certain amount of inventory to buffer the potential risk of the ** chain. This includes increasing the frequency of monitoring of this inventory to ensure that usage and inventory levels are kept up to date and that steps are taken to mitigate risk.
2.Respond flexibly to market changes
The rapid changes in the market environment require that we cannot rely solely on the management model of the past. When the risk of stockouts is reduced, we move supplies out of strategic inventory in a timely manner and reconsider them as normal management inventory. It is important to have clear standards,For example, based on the difference in reliability and arrival time, to decide when to make such a changeover.
3.The challenge of strategic inventory
It is worth noting that it is relatively easy to decide to put a supply into strategic stockpiles, but it is even more difficult to decide when to move it out, in part because of the psychological anxiety associated with it. Therefore, it is crucial to set clear standards in advance.
In an ever-changing market environment, a flexible and integrated inventory management strategy is key. We encourage manufacturing companies to rely not only on simple solutions to increase inventory, but also on optimizing inventory through granular inventory management, combined with real-time data and forward-looking analytics. Leveraging cross-departmental wisdom and information to continuously and flexibly manage inventory is an effective way to achieve inventory optimization and meet the challenges of the ** chain.