Inventory generally constitutes the second largest item after fixed asset in the financial balance sheet of a manufacturing company. From a financial perspective, inventory is one of the major current assets that can contribute to maximizing the value of the firm and no significant disadvantages are seen in carrying more inventory. But investments in inventory carry cost. Funds invested in inventory cost the firm by way of interest on working capital borrowings from the bank at the current interest rates. Therefore, reduction in inventory will reduce inventory handling and carrying costs. The benefits of inventory reduction will be reflected in terms of increase in profit margins, return on investment (ROI) and economic value addition (EVA).
Today, inventory investment is viewed as a supply chain cost driver rather than as a material asset. Hence, the lean supply chain operating on material requirement planning (MRP), distribution requirement planning (DRP) or the just-in-time (JIT) system is preferred, since it has the maximum inventory turns (ratio of sales to average inventory) for reducing cost on inventory investments and enhancing the bottom line and return on investments.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.
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