Stocks are current assets and they represent resources an organisation can easily turn into cash. They are kept to synchronise demand and supply.
Loss of inventory is therefore as good as loss of cash. Inventory management skills are needed to ensure inventory planning is in sync with demand to avoid over and under-stocking. It is costly if production stops or an opportunity for a sale is missed, as a result of non-availability of inventory. It is also costly to keep inventory that has no immediate use.
Loss of inventory is mainly through pilferage and damages, but there are other forms of losses that exist when the physical stock is present. Stocks are bankable assets when they represent business value to an organisation. Business value stocks are separate from stocks that are rendered useless within useful stock. Many organisations today are boastful of a healthy inventory on the balance sheet of commodities that cannot be utilised anyway within the organisation. This stock might be expired, obsolete, or redundant.
There are products with a limited shelf life that have to be consumed within specific timeframes. Chemicals and pharmaceuticals fall in this category.
Hardware items such as paints have use-by dates, limiting the time the product can be available for consumption or use. Use-by dates are closely monitored in the pharmaceutical industry where first expiry first out is used to make decisions of what to issue or dispense, instead of first in first out to ensure commodities that have the shorter shelflife are used first.
Some products are rendered useless because of changes in consumer taste. The products will still be in good condition, but with no one interested in them. Obsolescence is a result of changes in consumer taste. The fashion industry is very vulnerable to such type of loss. Fashion is very dynamic and consumer taste shifts accordingly. In the good old days, we used to be treated to “markdown sales” when clothing retails shops were managing seasonal changes, with the aim of reducing the impact of obsolete inventory on the organisational books of accounts.
Technology is also dynamic. Very few years ago, typewriters were the “in-thing”, followed by desktops and now laptops to iPods. The same happened to printers, offices now operate laser printers from the ribbon cartridge printers. Rapid movements in technology render some stocks redundant. A number of companies still reflect redundant stocks in their inventories.
Efficient stock management is reflected by a number of scientific measures. The capability of an inventory manager is reflected by the value of inventory loss in relation to the total inventory value. The total expired, redundant and obsolete inventories all summed up are expressed as a percentage of total inventory value. An efficient inventory manager will have less than 10% loss of stock through these forms.
Stock turnover ratio also assists in evaluating the efficiency of the inventory manager. It evaluates how many times stock turned in a specific period. Stock turnover ratio is arrived at by comparing the total inventory over a period against the average inventory held. The higher the ratio, the more efficient the manager was. It implies that less capital was invested into the business to achieve the level of profits.
Efficient inventory managers must ensure that cycle stock — stock available to meet normal demand excludes dead stock — stock which does not turnover because it is no longer required in the system.