Why Inventory management (Stock maintenance) became one of the key factors within supply chain management
“WHY
INVENTORY MANAGEMENT (STOCK MAINTENANCE) BECAME ONE OF THE KEY FACTORS WITHIN
SUPPLY CHAIN MANAGEMENT”.
Prepared by:
Ashan Silva
AFNI (UK), CMILT (UK), ACIM (UK),
Ex. MSc (Strategic Marketing), Ex. MBA, CIM(UK), MBA, DBA(ABD)
Flow of material is one of the key factors
in supply chain management.
Supply of material can be from local market
or from international market. Through whatever the way decides, we should make
sure uninterrupted smooth material supply to maintain a continuous production
cycle. But in practical world, due to various reasons this flow might
interrupt. Due to e.g., natural calamities (earth quacks, floods, snow falls,
etc.), pandemic lock downs, strikes, etc.
So, organizations are always maintaining their
material stocks to avoid any such production interruptions due to material
shortage.
Excessive stock holding is always a cost. For
certain products it’s a must. e.g., wine industry. But for most of the products
in the market it became an additional cost.
At present as a result of efficient
inventory management tactics, organizations manage to run their production
effectively and efficiently by maintaining minimum stock levels as stock hold. Said
tactics supported them to increase their ROA.
Following example indicating the same in
details
Company sales - 18 million
Stock level - 25% of sales
Stock holding cost - 20% of Value
Operating cost - 12 million
Other assets - 18 million
ROA -
???
Sales -
18 million
Stock level -
25% of sales
- 18 X 25/100
- 4.5 million
Stock holding cost - 20% of stock value
- Stock level X 20%
- 4.5 X 20/100
- 0.9 million
Operating cost - 12 million
Total ope. Cost - Ope. Cost + Stock holding cost
- 12 + 0.9
- 12.9 million
Net income -
Company sales – Total cost
- 18 million – 12.9 million
-
5.1 million
Other assets - 18 million
Stock -
4.5 million
Total
assets -
Other assets + Stock Level
- 18 + 4.5
-
22.5 million
Hence ROA (Return
on Assets) - Net income
%
Total assets
- 5.1 million X 100
22.5million
ROA -
22.7%
If the same
organization reduce their stock levels till 15% of sales, ROA will be
Company sales - 18 million
Stock level - 15% of sales
Stock holding cost - 20% of Value
Operating cost - 12 million
Other assets - 18 million
ROA -
???
Sales -
18 million
Stock level -
15% of sales
- 18 X 15/100
- 2.7 million
Stock holding cost - 20% of stock value
- Stock level X 20%
- 2.7 X 20/100
- 0.54 million
Operating cost - 12 million
Total ope. Cost - Ope. Cost + Stock holding cost
- 12 + 0.54
- 12.54 million
Net income -
Company sales – Total cost
- 18 million – 12.54 million
- 5.46 million
Other assets - 18 million
Stock -
2.7 million
Total assets - Other assets +
Stock Level
- 18 + 2.7
- 20.7 million
Hence ROA (Return
on Assets) - Net income %
Total assets
- 5.46 million X 100
20.7million
ROA -
26.4%
Through the
result of the above example, it is evident that, if we maintain efficient
inventory management system within the organization, that can increase their
ROA and it will positively support to boost shareholders wealth.
THANK
YOU
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