Supply Chain Management : Inventory
What is Inventory?
Inventory refers to the list of goods and materials in stock by a particular company. The purpose of inventory is to manage and conceal the fact that oftentimes manufacture delay lasts longer than the delays in delivery. Inventory also eases the imperfections that result as part of the normal manufacturing of a product. These imperfections can lower production efficiencies in those instances where production is idle owing to a lack of needed materials.
The following stock reasons might apply to any stage of the product or any owner.
Buffer Stock: Sometimes the upstream workstation might get delayed in providing the next part that needs to be processed. In that case, a buffer stock is held at each workstation. Depending on the process, the buffer stock might be very large or tiny. In recent years, Toyota has been able to eliminate this type of stock.
Safety Stock: Safety stock is held just in case something goes wrong and a machine or the process fails. Total Productive Maintenance and similar programs can help eliminate this kind of stock.
Overproduction Stock: If the forecast and actual sales did not match up, then overproduction stock might be held. If you want to eliminate this type of inventory, instill a made to order program, or use JIT.
Lot Delay Stock: This kind of stock is generally held because part of the manufacturing process is only designed to work on a per batch basis. Thus, each lot item has to wait for the entire lot to be processed before being moved on to the next workstation. A single piece working can eliminate this aspect of inventory.
Demand Fluctuation Stock: This type of stock is held in instances where a production capacity is not able to flex according to demand. As a result, a stock is built up during lower utilization periods to be supplied to clients when the demand is exceeded by the production capacity. For this stock to be eliminated, a production line’s flexibility and capacity must be increased.
Line balance stock: These kinds of stock build up because of the fact that various sub-processes in a single line may work at different paces. So stock accumulates after a faster sub-process occurs or before a large lot size sub-process takes place.
Changeover stock: When a sub-process has a long set up time, then changeover stock will accumulate. While the change over is occurring, this stock can be used up. Tools such as SMED can help eliminate this changeover stock.
All of these inventory stock classifications apply to the entire supply chain – not just within one particular plant or facility.
Those in supply chain management who have to deal with inventory must learn a set of special vocabulary terms. One of these is SKU, or Stock Keeping Unit. This describes the combination of every single component that goes in to the assembly of a product. Anytime the packaging or product itself undergoes a change, then a new Stock Keeping Unit has been created. Keeping track of this helps one to manage the inventory.
Another important term in inventory is “stock out.” When you run out of the inventory of a Stock Keeping Unit, then the term “stock out” is used.
Another term is NOS, or New Old Stock. This refers to a product that was made a long time ago but has never been used and is now being offered for sale. Sometimes that product is not being produced anymore, and the New Old Stock represents the sole source of a particular product at present.
Accountants often treat inventory in terms of goods to sell. But a lot of organizations, such as non profits and manufacturers and service providers, have a whole store of inventory that is not intended for sale, such as furniture and office supplies. The inventory of manufacturers and distributors and wholesalers tends to gather up in warehouses or similar storage spaces. The inventory for retailers might be kept in a similar warehouse or a shop that is customer accessible. Inventory that is not intended to be sold to customers may be kept in any area of the business. Stock is merely money in disguise. If the stock is not controlled, then theft may occur.
A company that manufactures products will divide their sellable goods in to three different categories: raw materials, meaning those materials that will be used to create a product; work in process, meaning materials that have already begun to be transformed in to sellable goods; and the finished goods themselves, which are already ready to be sold to clients. Finally, there might be goods for re-sell that the company counts as inventory.
When it comes to accounting for inventory, every country has its own laws. In the United States of America, the Financial Accounting Standards Board, among others, regulates inventory laws. The United States Securities and Exchange Commission then enforces the laws. Inventory management can have a major effect on a business’s internal operations via their cost accounting methodologies.
Inventory’s internal costing and valuation can be quite complicated. In the old days, the vast majority of enterprises ran on a one process basis. This is seldom still the case in our technological era. Where these one process businesses still do exist, then an independent market value exists for that product.
In today’s complicated world, with numerous multi stage process organizations, much inventory that is held that would have once been classified as finished goods is now categorized as work in process. The valuation of these goods is a management decision, as there is no market for a partially finished item. The arbitrary valuation of work in process, in combination with the allocation of overheads, has led to some results that are not very desirable.
The inventory of a company can be a mixed blessing. On the one hand, on a balance sheet it counts as an asset. On the other hand, it can tie up funds that might be used for other purposes. It also must be protected, which requires extra money. Inventory might also be a burden on one’s taxes, depending on what the particular country’s tax regulations are on the depreciation of inventory.
On a company’s balance sheet, inventory will appear as a current asset. This is because the company can turn that inventory in to cash via selling it. Some companies might hold larger inventories for this very reason – they can inflate their apparent asset value, as well as their perceived profitability that way.
If a company stocks too little inventory, then they will not be able to take advantage of bigger orders from clients, as they will not be able to deliver. Indeed, here we must come face to face with two conflicting objectives: that of customer service and that of cost control. These interests can and oftentimes do pit the company’s operating and financial managers against their marketing and sales offices. If goods are unavailable at a particular time, this is likely to anger the sales department, who may be working on commission. The solution to this problem is to reduce the time of production to being nearly identical to the delivery time expected by the customer.
21st Century Cost Accounting
The accountant should help the company make better, more informed decisions in regards to their inventory. They can also help effect a wider change in the public sector that will result in an increased value in the investment of the tax payer. Wise accounting measures with regard to inventory can also aid the incentivization of progress, making sure that reforms are both sustainable and effective in the long run. It can also help ensure that success is recognized in the company’s reward systems, in both a formal and informal way.
This is where accounting plays a key role in supply chain management. It should be obvious to all involved that finances play a major role in nearly every aspect of a business. It should also help determine whether or not the business is going about its day to day activities in an appropriate, ethical fashion. Foundations have to be laid firmly to ensure that the public has confidence in a particular business – if not, then all will be lost.
It is also the responsibility of the finance department to provide all the necessary information, advice, and analysis to help the service managers of the company operate in a more effective fashion. This transcends the typical every day concerns with budget that so many of us are preoccupied with. It has to do with helping the company attain a higher understanding of how it performs in the market. This entails making connections between different fields as well as comprehending the complex relationships that exist among given inputs, which are the resources brought to bear, as well as the outputs and the outcomes that they attain.
LIFO and FIFO Accounting: When a dealer sells products from an inventory, the inventory’s value reduces by the cost of the goods sold. In the case of commodity items that cannot be tracked individually, the accountant has to determine a good method to identify the type of sale that has taken place. The two most common methods are “first in, first out” (FIFO) accounting and “last in, first out” accounting (LIFO.) The former refers to the first unit in the inventory as being the first one to sell, while the latter considers the last unit in the inventory as being the first one to sell. Depending on what method the accountant chooses, it can have a significant impact on taxes, value, and net income. By utilizing a LIFO accounting system, the business will report lower net income as well as lower book value due to inflation. As a result, the company does not have to pay high taxes. Some countries have banned LIFO accounting for this reason.
Standard Cost Accounting: In standard cost accounting, efficiencies, a form of ratio, are employed to compare materials and labor that were used to produce an actual good to the same goods that would have been required under the standard conditions. As long as the two rates are similar, there should not be much of a problem. It is true, however, that this kind of accounting developed over a century ago, when labor formed most of the cost in the production of products. Now labor constitutes a minor part of the overall cost, but this type of accounting continues to focus on it.
Standard cost accounting can also be quite harmful to an organization. If a policy decision is made to increase inventory, then the managers’ performance evaluation could be harmed. This is because in increase in inventory necessitates an increase in production, and as a result, processes have to operate at a higher rate than before. This means that if something goes wrong, then the process is going to take longer and use up way more of the labor time than is usual. Despite the fact that the management has no control over this problem, they will then seem to be responsible for the excess.
During tough financial times, business might utilize the same efficiencies to right-size, downsize, or reduce their labor force by other means. Workers who lose their jobs under such circumstances do not have control over excess inventory and cost efficiencies, putting them in the same helpless state as their managers.
It is thus advisable to find an alternative to this type of accounting – something that is easier said than done.
Theory of Constraints Cost Accounting: The “theory of constraints” was developed by one Eliyahu M. Goldratt in order to address cost accounting problems. The theory is based on the idea of “throughput accounting,” in which throughput – money obtained from items sold to customers – is used instead of output – items that might sell or might boost inventory. Labor is considered as a fixed cost rather than a variable one under this scheme. Goldratt defines inventory as everything that a business owns that it plans to sell, including such things as machinery and buildings. Throughput accounting only acknowledges a sole class of variable costs: that is, operating expenses such as components and materials that depend on the quantity being produced.
In today’s business world, inventory plays a significant role in national accounts. It also contributes to an analysis of the business cycle. Occasionally, short-term macroeconomic fluctuations can be attributed to the cycle of inventory.