STUDENTS' CORNER - 219
In our earlier
session, we saw the significance of inventory management; that is, a system evolved by the company that at the
earliest becomes sensitized to overstocking or under stocking; both the kinds
actually prove anti-business in the sense that one wastes your precious capital
by locking it in the form of raw materials and the other leads to loss of
customer because he does not get his product, that is, your product when he
wants it and that too because the product was not ready as the production
remained incomplete for lack of some components which you failed to have on
time in the required quantity. Both the
kinds of stocking ultimately in their own ways cost you.
In order to help
the company find out the very near exact level of right inventory which saves
money—a penny saved is penny earned, the proverb goes—promising a sort of
capital-comfort, experts talk of two kinds of inventory-related costs: Order
processing cost and Inventory carrying costs. Of course, a very sensible
business mind understands all these academic gimmicks, so to say,
instinctively. All the same, let us see how these two kinds of cost help us see
the onset of imbalance at the earliest between the right stocking and overstocking
and under stocking. Paying attention to
these two types of cost pays back positively to the business, to the bottom
line ultimately.
Order processing
cost covers, as the title itself suggest, the cost of the process of
manufacturing; that is, operating costs; to be exact, in details, the rent for
the factory, the salary of the employees, the machinery involved in the
manufacturing, the electricity and other incidental expenses, all put together
for a day; just a little attention is enough and usually, managers are supposed
to be aware of all these things because they are supposed to manage the
administration.
The inventory
carrying costs include storage cost, warehousing cost, the cost of the
components in the inventory and also the transportation cost. It is pointed out that the inventory carrying
costs must be less than the other one; it indicates the company is sensitive to
the market demands. Let us put it in
some details so that the concepts can be easily understood.
On any given day,
if the components in the inventory happen to more than the components used in
manufacturing, the cost of inventory is too much. Say, for example, if 55 units are there in
the inventory and only 45 are used; it means the cost of the inventory is
higher. On the other hand, if only 15 units are there in the inventory and 85
units are in the process of manufacturing; then, the inventory cost is less. It
means the company out of its relevant understanding of the market demand, has
not spent in excess to the need in purchase of the raw materials. It means the
inventory cost per day is just in right proportion to the demand; capital is
sensibly invested and it leads to enriching the bottom line.
Of course, a
sensible business man knows all these things without many difficulties; market
dynamics teaches him the business fundamentals and he knows the value of the
capital.
Perhaps, we can
conclude pointing out what Sony did in inventory building; it calls its
principle simply, SOMO; Sell One, Make One. You build inventory to Order and
not to Stock. Dell went one step ahead. It will get advance from its customer
who wants a Dell product and from the advance the company buys component. That
is, the customer pays for his product; that is, the customer contributes to the
capital of Dell. It is customer-centric inventory.
Perhaps the
importance of inventory management has been explained simply and effectively
too.
In our next we
shall move on to the next topic in logistics: Transportation and Warehousing.
