Everybody says that the inventory is bad for companies. Nevertheless, all companies have inventory. They cannot survive without it.
Why do the companies have inventory? Some of it because they need it now, some of it because they will need it soon and, some of it they have just in case will need it.
Let’s see what kind of inventory companies usually have. All companies have two type of inventory:
1. Inventory that intends to sell (raw materials, work in progress, finished products). Let’s call this the operational inventory.
2. Inventory that does not intend to sell (tools, land, buildings, etc.).
The first type of inventory has a variable value. We could increase its value by buying more stuff or, decrease it by buying less stuff. From the financial point of view, this is the most important type of inventory because it directly influences the operational expenses and cash flow. So, we could say, the value of cash flow is inversely proportional to the value of the inventory. On the other words, if we want to have a good cash flow, we have to have a low inventory.
In these new circumstances, let’s ask again why do the companies have inventory?
You see, the companies have inventory to avoid an unknown situation which could affect their activity. For example, if a supplier has various problems and cannot deliver on time, no problem, we have inventory. Or, if the customer order more than we planned, no problem, we have extra finished goods ready for shipping. You get the point.
So, the inventory protects the companies against almost any problem your operations may face. It is an insurance against risks. And, like any insurance, cost money.
In this situation, a company with risky suppliers, a disorganized manufacturing facility, and unknown customer demand, need more insurance. Which means the company needs more inventory.
Only by organizing better the manufacturing facility a company could quickly decrease the level of inventory with at least 20%. Only by organizing better the manufacturing facility a company could quickly decrease the level of inventory with at least 20%. To do that, implement the principle: “Keep everything in motion”. When something is not moving, ask yourself if and when you need it. Additionally, to speed up your production implement next principle: “Take the work to the man, and not the man to the work”.
So, if you want to decrease the cost of your products, then reduce the inventories. In this way, maintaining the same selling price, the profit will be higher or, keeping the same profit, the selling price will be lower. (Remember the non-cost principle).
Personally, I am against the inventory because it covers many problems and, low performance. But from the above reasons a certain level of inventory it is necessary. Our target is to reduce continually as much as possible this level. To do that,
Keep everything in motion and take the work to the man and not the man to the work.
I look forward to your comments, suggestions and/or questions.