What effect does inventory have on a business?

Question

Is it better to have little inventory? How does a large inventory hurt the bottom line?

Answer 1

I worked for Chrysler. I saw many changes and learned a few things in those years. As time passed, the company learned that the more inventory they had in transit (being hauled to the assembly plants) the more money they had invested in that inventory and the less it had in investments earning interest.
So was born the "Just in time" delivery system. Fewer trains were used, (they are slow) more semi-trucks were used. (They are faster) That meant fewer goods were in transit and more cash was in the bank earning money.
The problem was that with just in time delivery, if a storm or other unforeseen emergency arose the "just in time" didn't make it in time and some assembly plants would be full of people but the assembly line was not moving due to a critical shortage. That situation was on the assembly side.

Now to look at the delivery side.
If Chrysler had too many vehicles sitting on lots, there was a lot of money tied up in the merchandise waiting for buyers and less money in the bank to use as needed by the company. But, if the company didn't have those vehicles on the lots they couldn't deliver them to the customers should the market for new autos suddenly increase. As with declining interest rates, or incentives.

So, the whole thing is a balancing act. Don't have too much inventory that will hinder the ability to stay flexible but yet have enough inventory to please the customers.


Better to have just enough inventory to fulfill demand.
Too much inventory takes money out of the bank/savings/investments and leaves too little for other projects of the business.

Answer 2

Too much inventory is definitely undesireable. Inventory is costly, and is really a liability until it is sold. Depending on the size of the business, holding costs can be substantial for maintaining excessive inventory levels. Storing inventory is a non-value added activity, and is unnecessarily costly. Inventory ties up cash and can make it difficult to pay bills on time until the inventory is sold. This could lead to higher interest payments if bills are not paid, or the need to take on long term debt.

Answer 3

A small amount of inventory will improve stock turnover and improve cash flow. however only having a small amount of inventory may not allow the business to take advantage of unexpected increases in sales, thus customers may shop else where.

Answer 4

too much inventory can tie up your Cash Flow meaning bad for your business
too little inventory is your business can't keep up with demand, your customer will find some other source

Answer 5

You tie up your money that you could otherwise use to generate more income even by placing it in an interest bearing bank account.