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Companies used to measure their muscle by the size of their inventory. Bigger was better. Vast warehouses filled to capacity ensured efficient assembly lines and guaranteed that, come hell or high water, production would never stop. Who cared about carrying costs? They would be erased by increased sales. But now that equation has changed. Lowering inventories is one of the quickest ways to decrease working capital needs. Performance measurements, such as the old standby ROA (return on assets) and the newer EVA (economic value added), as well as other measures that gauge how efficiently capital is used, have become more common organizational drivers. In fact, many times an executive's bonus depends, at least in part, on how efficiently capital is used. Couple the drive for efficient capital use with the need to respond more quickly to changes in customer demand, with shorter and shorter order-to-delivery cycle times, and you have a problem that is challenging many organizations. Leaner and Meaner In the big picture, American business has succeeded in its quest to run lean. But almost all these gains in inventory reduction happened from 1981 to 1991, and the past 10 years have not seen much improvement. Inventory as a percent of GDP held steady at 3.8 percent from 1992 to 2000. Rather than being eliminated, inventory has been pushed down into the lower reaches of the Supply Chain, from manufacturers to top-tier suppliers to lower-tier suppliers. GM, for example, improved inventory turns, a common metric that measures total cost of goods sold divided by average inventory, and serves as a valuable indication of how often a company sells out its inventory (the higher the better) - 55.2 percent between 1996 and 2001. However, the company that supplies its tires, Goodyear, saw its inventory turns decline 21 percent during that same time. In other words, lower-tier suppliers are left holding the bag for the big boys like GM and Wal-Mart. Inventory Management Theory Inventory and the management thereof belong to everyone in the company but nobody wants to own it. Inventory Management is truly interdisciplinary and spans from financial and managerial accounting, to operations research, material handling to Logistics. The following is a quick overview of Inventory Control/Management terminology and theory. Reasons for Holding Inventory: Inventory balances supply and demand Inventory acts as a buffer between critical Supply Chain interfaces supplier – procurement procurement – production production – marketing marketing – distribution distribution – intermediary intermediary – user Inventory allows for economies of scale in Purchasing Transportation manufacturing There are various reasons for holding inventory. Inventory acts as a buffer between supply and demand fluctuations and irons out supply chain system failures. The smoother your supply chain operates and the better you are able to forecast the less inventory you have to hold, unless you gain some economies of scale in purchasing, transportation and or manufacturing. Categories of Inventory Raw Material Inventory Work-in-progress Inventory Finished Goods Inventory There are three categories of inventory; too much in either may be a bad thing unless you have reasons for it such as seasonality, production runs, and prevention of stockouts or improvement of customer satisfaction levels. Types of Inventory/Stock Cycle sto