Question

Please explain why some managers feel that too much inventory is evil? Please explain in detail.

Answer 1

Inventory is the goods and materials available for sale and raw materials used to produce goods available for sale. Inventory is considered as most important current asset of any business, as the turn over of inventory is one of the main sources of revenue for an organisation. Inventory is divided in to three categories, raw materials, work in progress and finished goods. It is a short term asset as it is usually liquidated with in one year.

Processing a high amount of inventory for a long time is not beneficial for a business. However, processing too little inventory is also not beneficial. Therefore a proper inventory management strategy can help to minimize the inventory cost. For example Just-in-Time inventory method. This method helps the business to save significant amount of money and reduce waste by keeping the inventory level they need to produce and sell the product.

The company hold excess inventory for many reasons like guarding against shortages, ensuring bulk purchasing discounts, dealing with shift in customer demand. Excess inventory, while it may provide a cushion against stick outs, is not a desirable condition for company.

Cost:

Excess inventory ties up the funds, the company could use in other areas. It also increases the storage cost and consumes the warehouse space. Holding too much inventory ultimately affect the cash flow of the business, especially inventory is sitting in storage and not being sold.

Obsolescence:

Consumer tastes change quickly and the products can become out-dated while sitting on a warehouse. This mainly affects the clothing and fashion business.

Decreased flexibility:

Storing excess inventory leads the company to take more time to change to a new product. This decreases the flexibility of a business while responding to a changing market condition.

Perishable products:

Overstocking of perishable goods often result in the items sitting in storage past the recommended use by date. In this case the business owner has to sell the inventory deeply discounted prices to clear up the products before use by date.