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Impact of holding inventory

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As stated in last article, companies do hold inventory as they need for running their business.

But holding inventory is not free and so has many financial drawbacks:



•    Cash flow negative impact: the more you buy raw materials or any goods the more you consume cash only for holding inventory. And now if you know that 50% of inventory time spent is for waiting, you realize the waste in the company cash flow balance.

•    Increase inventory carrying cost: high inventory increases the warehousing cost (facility, handling…) the investment cost (borrowing, opportunity…) and holding cost (insurance, obsolescence…) directly linked to the increase of inventory. Inventory carrying costs are embedded in the general & administrative expenses so impact the P&L or statement of income.

•    Increase of labor cost: usually high inventory level conducts to inventory discrepancies, so lots of (re)counting, tracking and tracing costs associated. Moreover in case of inventory discrepancies the results have always negative financial impacts when noticed…it’s already too late! Again the labor costs are embedded in the general & administrative expenses so impact the P&L. The inventory discrepancies impact directly the COGS – so high warning!

Moreover, holding high inventory levels always hide process inefficiencies where inventory is made to cover malfunctions such as breakdowns, quality issue, absenteeism, long die exchange time…

So better to slim fast!

Last modified on Wednesday, 29 August 2012 15:02

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