After reading this article you will learn about the inventory buildup and actions for avoiding it.
Inventory buildup starts because of the reasons, either (i) items get ordered in excess of the requirement or (ii) they do not get used at the same rate at which they are received.
To overcome the first possibility, orders should be placed after consulting the production department. Production and Materials Management departments must together work out the delivery schedules, which must be decided after considering the past schedules, which must be decided after considering the past performances of the suppliers.
Sometimes inventories, get build up because excessive quantities are received at a particular time. For example, receiving the year’s requirement spread over 4 quarterly deliveries, is different from receiving in one lot. In the second case the organisation is forced to carry inventory of 12 months at a time. The other danger is that such material deteriorates in storage or pilfered or damaged.
Now coming to the second aspect, store’s inventory is consumed by the production department by drawing materials from stores and converting it into finished goods. If the consumption rate falls down, then inventory buildup takes place.
The consumption rate may fall down because of any of the following reasons:
i. Due to change in production plans.
ii. Due to discontinuance of manufacture of a product.
iii. Due to change in design for a particular assembly or set of components.
In such cases rescheduling of the deliveries or reducing the quantities of the pending order must be assorted to. In case the item is not required at all, the further supplies must be stopped and pending orders be cancelled.
Actions to be Taken for Avoiding Inventory Buildup:
(i) Items with no issues and receipts in last one year should be identified in the beginning of the financial year. In consultation with production control and research and designs department all the pending/open purchase orders, if any for all these items should be cancelled.
(ii) In the cases where, items have been received without any issues in the past, matter should be investigated.
These investigations may reveal either of the following:
(a) Items are for new project and utilisation is expected to be started in near future.
(b) Items are received for the production planned a few months later.
(c) The item is a replacement for an obsolete item, but will be issued only after existing stock of the obsolete item is exhausted.
(d) The item is for a product whose production has been suspended or delayed due to a temporary slump in the demand.
(e) Item is supplied much ahead of the requirement.
(f) The item is not required.
No action is required in the cases of (a), (b) and (c), whereas immediate action is called for in the case of (d) and (e), rescheduling the deliveries and reducing the total order quantities. In case of (f), immediate stoppage of further supplies and cancellation of pending purchase order has to be done.
(iii) A list of items which are in excess of predetermined levels should be prepared and investigation is to be done as to why the level has gone up and whether their supplies need to be slowed down.
(iv) Do not accept the following reasons for early supplies:
(a) We need the material any way
(b) What difference does it make if we have a little extra stock.
(c) Let us not harass the poor supplier. Taking back the material will mean a lot of extra expenditure to him.
(d) It we return the material today, he may not supply in time on the next occasion etc.
Therefore, at the risk of causing some inconvenience to the supplier, goods if received in advance of intimated delivery schedules should be returned back.