Advantages of Inventory Control

“Inventory is money sitting in another form.” Russell Honore

Russell Honore’s saying, “Inventory is money sitting in another form,” can be elaborated to highlight how excess inventory can tie up working capital and its impact on financial efficiency. Here are some examples that illustrate this perspective for a better understanding of the phrase.

Raw Material Stock: Imagine a component manufacturer that purchases raw materials, such as metals or plastics, for its production process. If a company orders raw materials in excess of current requirements and stores them in excess, these materials become inventory. However, until these materials are used in production, the money spent on them is essentially tied up, and there is no return. This can increase a company’s working capital and potentially increase storage and inventory management costs.

Unsold Components: Consider a scenario where a component manufacturer produces a specific type of component to order for a particular customer. If customer demand drops unexpectedly or an order is canceled, unsold finished components may remain in a manufacturer’s finished goods store. These components represent money that could have been invested elsewhere or used to fulfill other orders immediately. The longer these components remain unsold, the more financial resources are held up, increasing the company’s working capital needs.

Obsolete or out-of-date inventory: In a fast-paced world of technology and innovation, component manufacturers need to stay updated with the latest advancements. If a manufacturer keeps old or obsolete components in its inventory, those components lose value over time.

Additional Work in Progress: If a manufacturer does not manage its production flow efficiently, it may have excessive WIP inventory. It ties up money in labor, materials, and overhead costs until the components are completed and shipped to customers. Optimizing the production process to reduce WIP can free up resources for other, more important activities.

Supplier Inventory Management: Component manufacturers often rely on suppliers for specific parts or materials. If a manufacturer does not have a streamlined inventory management system, it may overorder supplies in anticipation of future demand. This can lead to higher working capital requirements as money is invested in excess inventory instead of being available for more strategic investments.

Seasonal Demand Fluctuations: Some component manufacturers experience seasonal variations in demand for their products. If a manufacturer produces a large number of components during a high-demand season but fails to sell them all, the excess inventory may tie up funds that could be used to meet off-season operating needs or better funds can be used to invest in some other useful area.

In all of these examples, the key takeaway is that excessive inventory drives up working capital that could otherwise be used for growth, innovation, and increasing operational efficiency. Just as money must be invested wisely to generate returns, inventory management must be a strategic priority to prevent unnecessary financial stress and improve the overall health of component manufacturing industries.