Inventory, as a large item on the balance sheet, is always an important concern for a manufacturing company and...
By submitting your personal information, you agree that TechTarget and its partners may contact you regarding relevant content, products and special offers.
its finance team. Most financial managers would like to see inventory reduced to free up cash for other purposes. Since inventory is necessary to support sales with product availability, it makes sense to measure inventory relative to sales volume using inventory turns, a measure of the ratio of cost of goods sold to inventory.
The CFO should realize two important points about inventory. One, inventory does serve a purpose -- it is the finished product available for sale and the parts available for production -- and two, there is a "right" amount of inventory needed to meet expected demands. A certain amount of inventory is usually kept to accommodate variability and uncertainties, like forecast error, production disruptions, quality problems and the like. Usually called safety stock, this additional inventory reduces expediting and helps ensure availability and the desired customer service level.
Operations managers are just as interested in reducing inventory as the finance team is, but they immediately and more directly feel the effects of too little inventory, usually at significant cost. Undue pressure from finance to raise inventory turns or reduce inventory to a level below what's required to avoid shortages can lead to undesirable -- that is, expensive -- consequences, including disrupted production schedules, expedited orders, premium freight costs, backordering and lost orders from customers who cannot wait for their products.
Operations hopes that finance will view the inventory balance and inventory turns in the context of why you have inventory and what the right amount of inventory is. For its part, operations can and should work toward lowering inventory, or more correctly, increasing inventory turns, by addressing the factors that threaten availability, thereby requiring safety stock.
Companies should be able to easily justify investments and performance improvement projects to increase forecast accuracy, improve inventory control, record accuracy, increase visibility and drive supplier and production reliability (reduce the risk of late deliveries). As these improvements take hold, safety stock can be reduced without reducing availability.
How the CFO can become more strategic
Why financial data can create success
The tech your finance office needs on its radar
Dig Deeper on Inventory management technology
Related Q&A from Dave Turbide
Inventory -- although necessary -- is expensive to keep and needs fine-tuned management. Here's a look at why inventory optimization software can ...continue reading
E-commerce is having a powerful effect on logistics and the supply chain. Here are three developments that are happening today that are likely to ...continue reading
The direct-to-consumer model is transforming warehouse management and, in turn, supply chain management. Here's a look at how robotics is helping to ...continue reading
Have a question for an expert?
Please add a title for your question
Get answers from a TechTarget expert on whatever's puzzling you.