Managing Inventory

Inventory is an area where financial managers can fine-tune the firm’s cash-flow. Inventory sitting on the shelf represents capital that is tied up without earning interest. Furthermore, the firm incurs expenses for shortage and handling, insurance, and taxes. And there is always a risk that the inventory will become obsolete before it can be converted into finished goods and sold.

The firm’s goal is to maintain enough inventory to fill orders in a timely fashion at the lowest cost. To achieve this goal, the financial manager tries to determine the economic order quantity or quantity of raw materials that, when ordered regularly, results in the lowest ordering and storage costs. The problem is complicated by the fact that minimizing ordering costs tends  to increase storage costs and vice versa. The best way to cut ordering costs is to place one big order for parts and materials once a year, while the best way to cut storage costs is to order small amounts of inventory frequently. The challenge facing the financial manager is to find a compromise that minimizes total costs.

That is why many businesses today are turning to just-in-time inventory control. Businesses—and even divisions within companies—link up through computers with their customers and suppliers, thereby automatically ordering only as much as is necessary for a given period of time.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

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