work-in-process (in which some value has already been added), and products that do not "move" but just sit there as inventory.
Capital costs "move" with the clock and thus never sleep The company must keep paying these costs while its inventory snores away.
It should be apparent by now just how much inventory betrays the whole principle of finance, which is to "procure and operate capital" Although businesspeople make use of the term "inventory investment," the truth is that inventory alone offers no return on investment and therefore should not be considered an investment at all. How helpful it would be if everyone kept this simple fact in mind
Lesson 16. Inventory Is Not an Investment
When "Appropriate" Inventory ls Not Appropriate
People in training for the job of inventory management often run into texts with titles along the lines of, "Inventory: Not Too Much and Not Too Little Keeps Production Running smoothly." "Not Too Much" foreshadows the text's admonitions to drastically reduce inventory.
But what does "Not Too Little" refer to? It refers to a com mon piece of advice: Make sure you have at least some excess inventory. It does not mean "minimize" inventory. It says that we are supposed to maintain a little "fat" in the inventory, but not too much.
The philosophy behind this "keep a little fat" approach to inventory is that having a little extra inventory on hand as a sort of "buffer" will enable the factory to respond quickly to surprise sell-outs or shortages of materials and products. However, in view of the wide range of products demanded of factories by today's diversifying market needs, how little can "a little fat" really be and still serve as a buffer? We have to face the fact that, in today's marketplace, surprise sell-outs and parts shortages are still bound to happen when we