Inventory

TUTORIAL 4 - Inventory

Explain how excessive inventories can rode firms’ profitability.

When a company is doing excessives inventories the net profit is reduced because of the out of pockets costs that are associated with maintaining the inventory. Among those costs are: the insurance, the storage, the taxes, the obsolescence, theft or damages… To maintain the quality extra costs are generated. Thus, the cash flow is decreasing. Also, the money invested in inventory could’ve been invested elsewhere to better the business and reduce costs therefor generating more income.

2. What are some of the signs of poor inventory management?

Signs of poor inventory management include bad forecasting, inefficient operation planning, poor product maintaining, bad relationship with manufacturers and suppliers, obsolescence of products, bad customer relationships, delays in delivery, no safety stock…

3. Briefly explain FIVE types of inventory with examples.

Transit inventory represents the amount typically in transit between facilities or on order but not received. For example, a customer ordered a set of sofas from IKEA, the order hasn’t reached the point of destination yet so it is considered as a transit stock for IKEA.

Obsolete inventory is stock that is out-of-date or is not in recent demand. For example, a company that sells textbook published a new edition of a said textbook, all the previous editions can be considered as obsolete.

Speculative inventory is bought to hedge a currency exchange or to take advantage of a discount. For example, a company forecasts that for Chinese New Year, customers will have to do more grocery shopping so they increase the stock.

The cycle inventory (base stock) is the portion of average inventory that results from replenishment. It is a stock to fulfil the