Inventory consists of items owned by enterprises and which flow through supply chains. Items include raw & packaging materials, ingredients, parts, components, assemblies & sub-assemblies, work-in-process, and finished products.
People aren’t inventory nor are equipment or assets which enable the transformation, storage, handling, or conveyance of items.
Inventory typically also does not include operating supplies, spare parts, and office supplies. Anything that does not become part or added into a product or service is not inventory, although some financial professionals categorise them as a separate type. (Accountants classify some operating supplies, spare parts, and operating supplies as assets, until they convert them to expenses when allocated and used).
Inventory in enterprises’ balance sheets are assets, but many executives don’t consider it as such. They pretty much prefer that inventory be liquidated to cash, which they believe would be much more useful. (Cash is king, as some say).
Inventory, unlike cash or current assets (e.g., stocks, bonds, securities), does not earn interest or increase in value while sitting still. Instead, inventory incurs costs from the need of managing the tangible items which make it up.
Inventory Management includes the receiving, keeping, storing, securing, handling, conveying, recording, reporting, dispatching, and transportation of items under its purview. It also includes the mitigation of risk of loss of value of items from instances of damage, obsolescence, pilferage, and degradation.
Managers from sales to operations see inventory as a requirement. Inventory provides an immediate reference for salespeople to assure customers of available finished products. Manufacturing managers rely on inventory to supply materials for continuous production and avoiding costly shutdowns. Logistics managers depend on inventory to deliver pending orders completely and on time.
Because many financial executives and sales & operations managers have different opinions when it comes to inventory, such as from respectively wishing there were very little of it to there being as much of it as possible, enterprise conference rooms would be scenes of debate as to the strategies of managing it.
Inventories would swing low during economic downturns and likely climb when there are demand upticks. Importers of merchandise such as toys and home décor brought in many container loads of goods from China to the United States in 2019 only to be caught with excess stocks when the CoVID pandemic struck in 2020. When their inventories shrunk by 2022, the same importers rushed shipments to meet expected higher demand. Enterprises arbitrarily adjusted their inventory strategies depending on the times.
They also switched their schools of thought from the Lean or Just-In-Time concepts of keeping almost no inventory to the Just-In-Case principle of having buffer inventories to minimise risks from unexpected events (e.g., overnight announcements of higher international tariffs).
As much as sales & operations managers agree to the need of inventory, they would give in to the financial executives’ desire to not to have too much of it. For managers with experience in whatever function, managing inventory is a constant challenge given what all the work & investment one must put into it.
Inventory, thus, is a problem, more than it is an asset.
What should one do about inventory? How does one formulate an ideal management strategy for it?
How does the enterprise reduce it without sacrificing service and availability to promise complete & timely deliveries to customers?
On one hand, the solution lies with whatever operations strategy an enterprise undertakes. If customer service is paramount, the enterprise must, together with its partners (i.e., vendors, customers, 3rd party service providers), prioritise sufficient levels of inventories at various stages of the supply chain to ensure there would be enough stock to guarantee deliveries of products & services.
If the enterprise seeks lower costs and maximum cashflow, then managers should work toward increasing efficiencies via higher production & shipment volumes while negotiating with customers to increase order quantities and accommodate longer delivery lead times. Doing such would allow enterprise managers & partners to move merchandise in larger ‘batches’ while reducing stocks on hand. Enterprise executives could also limit the number of products they’d sell to minimise how much they’d need to keep on hand.
On the other hand, supply chain engineers (SCEs) could improve systems & structures to streamline inefficiencies in operations which in the first place could be root causes for why there are inventories.
Rationalising how inventories are managed such as using an ABC system and improving inventory record accuracies are two (2) examples where SCEs could help.
But first things first, executives & managers need to recognise that carrying out any strategy towards inventory is just as much an engineering undertaking as much as it is a job of management.
When it comes to supply chains, one enterprise cannot manage inventory alone. Nor can an enterprise improve inventories by itself. Managers would need engineers to re-structure operations and set up systems for the sake of garnering more productive benefits from inventories.
Inventory is made up of items kept and moving through supply chains. Accountants categorise inventory as an asset but executives see it more as a subject included often in strategic planning.
But management alone won’t fix the chronic challenges of inventory, supply chain engineers could help by improving systems & structures which govern it. Executives just need to realise that inventory is a problem engineers could fix and improve on, with potentially productive benefits.
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