P.J. Jakovljevic
The conundrum of inventory management and the notion of inventory as a "necessary evil" (or the "asset versus liability" dilemma) have long been haunting and bedazzling operations and financial and accounting managers. It is a well-known fact that managing inventory risk is about managing the cost of maintaining unnecessarily high levels of inventory against the risk of running out of stock at a crucial moment of truth (MOT) when a customer actually wants something. In a variety of aspects, inventory management is at the heart of the supply chain management (SCM) realm. Supply chain organizations are responsible for all the processes from sales and operations planning (S&OP) to customer fulfillment, inventory optimization, and new product delivery and introduction (NPDI)—all of which involve the planning and movement of inventory. Profit margins are also directly proportional to operational excellence in each of the above processes.
While cherished by material management folks as supply chain "grease," inventory is not that beloved by financial managers. For one, owing to dreaded inventory costs, start with carrying costs. APICS Dictionary (formerly standing for American Production and Inventory Control Society, but recently renamed the Association for Operations Management) defines carrying cost as follows:
The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). Carrying cost depends mainly on the cost of capital invested as well as such costs of maintaining the inventory as taxes (based on the value of inventory on hand at a particular time) and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.
The topic here is not traditional inventory optimization. That issue has already been tackled in previous articles (see Inventory Planning & Optimization: Extending Your ERP System and Lucrative but "Risky" Aftermarket Business—Service and Replacement Parts SCM). It enables clients to reduce investment in stock while at the same time maintain or improve customer service levels. Given that most inventory optimization techniques work on the premise of stock items being in their prime time, the focus here rather is on the tricky effect of product life cycles on inventory.
The motto "time is money" certainly holds true when it comes to inventory valuation. Well, maybe in a reverse (negative) manner, because typically neglected in the continuous battle for executives' focus and priority is the management of at-risk, aging inventory—be it excess active, obsolete, returns, or refurbished inventory. Some refer to these items as "slobs," which stands for "slow moving and obsolete" ones. In other words, most companies in the sectors of high-tech, consumer electronics, retail, and consumer packaged goods (CPG) are focused on new product introductions. Given that everybody is most excited in the early stages of product life cycles (that is, devising and delivering the brand new, "coolest" products), much less attention is paid to the languishing, "totally so not cool" older product lines, with millions of accompanying inventory asset recovery dollars slipping away annually as a consequence.
The S&OP process is chartered with aggregating demand from all sources, translating that demand into a production plan, and ensuring that the sellable product is in the right place at the right time for the duration of its active life (see Sales and Operations Planning Part One: Identifying and Forecasting Demand). In this process too, little time is afforded to the continuous assessment and disposition of excess active inventory, which comes from the ever-quicker pace of new product introduction that drives constant product turnover. Further, the rate of customer returns—reportedly up to 20 percent in consumer electronics—results in returned and refurbished inventory. Industry estimates of inventory excess in the high-tech sector alone reportedly approaches $2 billion (USD) annually, whereby most companies, in the best case scenario, are liquidating that excess "asset" at 20 percent of its original cost. Therefore, possibly the most hated notion for any financial manager is the one of inventory write-off, a deduction of inventory dollars from the financial statement because the inventory is of less value. An inventory write-off may be necessary because the value of the physical inventory is less than its book value or because the items in inventory are no longer usable.
Sure, one has to reckon with inventory shrinkage or losses of inventory resulting from scrap, deterioration (owing to product spoilage or damaged packaging, for example), pilferage, etc., which is one of the considerations included in the above definition of inventory carrying cost. However, what can be particularly annoying and hurtful is the notion of slow-moving items, or those inventory items with a low turnover. Inventory items falling in this category have relatively low rates of usage compared to the normal amount of inventory carried, and eventually become completely obsolete inventory. That is to say, the items have met the obsolescence criteria established by the organization. An example of obsolete inventory would be inventory that has been superseded by a new model or otherwise made obsolescent, and thus will never be used or sold at full value. While on the one hand disposing of such inventory may reduce a company's profit, on the other hand, a company that defers the liquidation process to a once every several months, crisis-like dumping is virtually throwing money away.
SOURCE:
http://www.technologyevaluation.com/research/articles/let-the-excess-inventory-flow-18882/
The conundrum of inventory management and the notion of inventory as a "necessary evil" (or the "asset versus liability" dilemma) have long been haunting and bedazzling operations and financial and accounting managers. It is a well-known fact that managing inventory risk is about managing the cost of maintaining unnecessarily high levels of inventory against the risk of running out of stock at a crucial moment of truth (MOT) when a customer actually wants something. In a variety of aspects, inventory management is at the heart of the supply chain management (SCM) realm. Supply chain organizations are responsible for all the processes from sales and operations planning (S&OP) to customer fulfillment, inventory optimization, and new product delivery and introduction (NPDI)—all of which involve the planning and movement of inventory. Profit margins are also directly proportional to operational excellence in each of the above processes.
While cherished by material management folks as supply chain "grease," inventory is not that beloved by financial managers. For one, owing to dreaded inventory costs, start with carrying costs. APICS Dictionary (formerly standing for American Production and Inventory Control Society, but recently renamed the Association for Operations Management) defines carrying cost as follows:
The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). Carrying cost depends mainly on the cost of capital invested as well as such costs of maintaining the inventory as taxes (based on the value of inventory on hand at a particular time) and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.
The topic here is not traditional inventory optimization. That issue has already been tackled in previous articles (see Inventory Planning & Optimization: Extending Your ERP System and Lucrative but "Risky" Aftermarket Business—Service and Replacement Parts SCM). It enables clients to reduce investment in stock while at the same time maintain or improve customer service levels. Given that most inventory optimization techniques work on the premise of stock items being in their prime time, the focus here rather is on the tricky effect of product life cycles on inventory.
The motto "time is money" certainly holds true when it comes to inventory valuation. Well, maybe in a reverse (negative) manner, because typically neglected in the continuous battle for executives' focus and priority is the management of at-risk, aging inventory—be it excess active, obsolete, returns, or refurbished inventory. Some refer to these items as "slobs," which stands for "slow moving and obsolete" ones. In other words, most companies in the sectors of high-tech, consumer electronics, retail, and consumer packaged goods (CPG) are focused on new product introductions. Given that everybody is most excited in the early stages of product life cycles (that is, devising and delivering the brand new, "coolest" products), much less attention is paid to the languishing, "totally so not cool" older product lines, with millions of accompanying inventory asset recovery dollars slipping away annually as a consequence.
The S&OP process is chartered with aggregating demand from all sources, translating that demand into a production plan, and ensuring that the sellable product is in the right place at the right time for the duration of its active life (see Sales and Operations Planning Part One: Identifying and Forecasting Demand). In this process too, little time is afforded to the continuous assessment and disposition of excess active inventory, which comes from the ever-quicker pace of new product introduction that drives constant product turnover. Further, the rate of customer returns—reportedly up to 20 percent in consumer electronics—results in returned and refurbished inventory. Industry estimates of inventory excess in the high-tech sector alone reportedly approaches $2 billion (USD) annually, whereby most companies, in the best case scenario, are liquidating that excess "asset" at 20 percent of its original cost. Therefore, possibly the most hated notion for any financial manager is the one of inventory write-off, a deduction of inventory dollars from the financial statement because the inventory is of less value. An inventory write-off may be necessary because the value of the physical inventory is less than its book value or because the items in inventory are no longer usable.
Sure, one has to reckon with inventory shrinkage or losses of inventory resulting from scrap, deterioration (owing to product spoilage or damaged packaging, for example), pilferage, etc., which is one of the considerations included in the above definition of inventory carrying cost. However, what can be particularly annoying and hurtful is the notion of slow-moving items, or those inventory items with a low turnover. Inventory items falling in this category have relatively low rates of usage compared to the normal amount of inventory carried, and eventually become completely obsolete inventory. That is to say, the items have met the obsolescence criteria established by the organization. An example of obsolete inventory would be inventory that has been superseded by a new model or otherwise made obsolescent, and thus will never be used or sold at full value. While on the one hand disposing of such inventory may reduce a company's profit, on the other hand, a company that defers the liquidation process to a once every several months, crisis-like dumping is virtually throwing money away.
SOURCE:
http://www.technologyevaluation.com/research/articles/let-the-excess-inventory-flow-18882/
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