Why managing issues of slow moving and obsolete stock?
There is no doubt that nobody want slow moving and obsolete stock in one’s warehouse but how exactly can those stocks affect business? I would like to introduce a simple example and some calculations based on that to explore the tangible negative effect:
Assuming PIM Aerospace has been holding aerospace components called “A” for 2 years and the quantity is 700 at unit cost HK$ 100. (Total original cost is 700* HK$100= HK$ 70,000) The company hope to sell these at 30% profit per unit. (Price HK$ 130). Assuming holding the inventory for 1 year would lead to inventory cost and the number of it is 25% of the original cost (25%* HK$ 70,000= HK$17,500). Cost of holding each one of the components is HK$17,500/700= HK$ 25 per unit per year.
So, the actual cost after holding the inventory 1 year has changed to:
HK$ 100+ HK$ 25= HK$125; so cost after holding it 2 years would change to:
HK$125*1.25= HK$ 156.25.
It means the actual cost of each components in these 2 years are rising at the rate of (HK$156.25- HK$100)/(365days/year*2 years)= HK$ 0.077 per day.
In other words, the profit the company is expecting (HK$ 30) would be breakeven after 389.61 days. (HK$30/ HK$0.077 per day=389.61 days). There would be no more margins at all by then. The profit would be eaten away by keeping the inventory in hand and doing nothing at all. Furthermore, it would be even harder to make profit because the cost would be HK$156.25 after 2 years, which means the company would have to raise the price more than 50% to avoid loss. The components would lose its predominance at this price level and customers may choose another supplier with a cheaper price.
In this case we can easily draw a conclusion that a company would benefit a lot if unnecessary inventory is well managed. So something must be done to cope with slow moving and