Fail to control inventory Stock, business fails to survive in the market
Business Analyst | 27 May, 2019 (Monday)View 1375
Inventory is the sleeping money. It determines the loss & profit of a manufacturing company even the existence of a company in the market. Company’s profit margin can be high and financial condition will be healthy by controlling inventories. On the other hand, company will get loss in the business even will be dropped out from the market if fails to control inventories. Some worst conditions are poined below
Profit margin reduction
There are two type of inventories and if those inventories are not controlled, there will be a huge negative effect on profit margin
1. Profit margin reduction due to raw materials inventory
If a company fails to plan about required raw material and can’t utilize raw material fully in production, raw materials inventory will be accumulated and those raw materials will cut the sales profit margin. Because those raw materials will not be converted in finished products and will not generate any money if those are not used in future.
2. Profit margin reduction due to finished products inventory
If a company fails to forecast market demand and produces more finished products than sales demand, sales will be less than production and finished products will be stored in the warehouse. For these remaining finished products, company will not generate any money. At the end it is a loss for the company and profit margin will be affected. May be company will never be able to sales those remaining finished inventory and make money.
If inventory is increased day by day and company can’t control the inventory, company will not able to run business.
Bankruptcy acceleration
Unused inventories are a waste of money. A Company invests money on the inventories but can’t get any return from the unused inventories. If a company fails to forecast exact market demand and can’t sales produced finished products to cover all the costs, company will be bankrupted.
Extra costing for keeping unused inventories
Cost is always involved in keeping unused inventories. A company needs to spend money to keep the unused inventory but will not get any return. Below costs are involved in maintaining unused inventory
- Labor cost
- Ordering cost
- Maintenance cost
- Carrying cost
- Administrative cost
- Overhead cost
These costs will be increased day by day and decrease company’s profit margin which will kill the company If a company fail to control its inventory.
Extra space requirement for increasing stock
More unused inventories need more space to store. So, if inventories are increasing day by day it will need extra spaces. Either company needs to build extra facilities or hires space from another places. Company needs to invest extra money but will not get any return from those inventories and it will kill company gradually. At the end, company will count lose and get lost from the business.
Difficult to compete in market due to price
A company will never be able to offer low price to customers without controlling inventories. Because company is losing money for unused inventories and getting low profit margin. So, company needs to increase profit margin. The only way to increase it is demand high price from customers. At the end company will not compete in the market and lose business.
No return form Obsolete Inventories
Quality will be deteriorated day by day if inventories are not used. At the same time, inventories value will be decreased. At the end company will not get any return if inventories are not used within expiry period. It will kill the company and accelerate bankruptcy.
Final thoughts
Every manufacturing company must need to control it inventory by recording each & every movements properly. Without recording each material movements, it’s not possible to control inventories. In this case company needs to establish a strong inventory processes and control those by proper technologies.
