Analysis of Advantages and Disadvantages of Carton Raw Material Inventory

Inventory refers to all the goods and resources that a company reserves. Inventory is of vital importance to the company. It can ensure the normal production and satisfy the customer's needs. However, the inventory also needs to occupy the capital of the company and increase the cost of the company. That is, the stock has both advantages and disadvantages. In packaging companies, inventory is very important. Because of the randomness of orders for packaging products, packaging companies must have a certain amount of inventory to meet the demand for orders. If inventory is insufficient, it will affect production. If the inventory is too high, it will occupy funds and increase costs. Packaging companies must keep inventory within reasonable limits.

All companies must hold a certain amount of inventory, inventory is necessary for the enterprise. It is no exception for packaging companies. The role of inventory mainly reflects the following aspects:

Separation of production stages, increase production flexibility. Inventory as a buffer for continuous production maintains the continuity of production, avoids partial production pauses caused by equipment failures, and other productions can continue. Inventory enables relative independence in all stages of production, which is conducive to smooth production. . Raw material inventory can separate the supply of production from the supply of raw material suppliers, overcoming the suspension of production due to delayed delivery of raw materials and contributing to the continuity and independence of production. Finished goods inventory separates the production process from the sales process and can produce a large number of products in advance to meet the market's future needs, which is conducive to the flexibility of the production plan and reduce costs. Inventory can also balance the total production capacity plan.

Meet customer needs and prevent out of stock. Inventory allows companies to meet customer needs at any time. The expected demand for customers is met with the expected inventory. For items that are required for certain seasonal needs, stockpiling must be carried out to meet the requirements of specific seasons. If the customer's needs are unknown, it is necessary to have safety stocks or buffers to meet customer demand changes so as to avoid shortage.

Regular advantages can be used. Companies generally purchase raw materials in excess of the quantity needed at the time to minimize the cost of procurement and inventory. Large-scale purchases, in addition to satisfying the needs of the time, can also meet the needs of later small batches, and the large number of purchases to reduce the number of orders can reduce the average unit purchase cost. Large orders can also use discounts, and suppliers may have to give a certain discount for large orders. Large orders also help reduce transportation costs. Large-scale production is generally less economical than a small amount of production. Excessive products have to go into inventory to meet the customer's future demand for small batches.

Prevent prices from rising. Due to the instability of supply and demand or the impact of inflation, prices of some raw materials may increase. At this time, companies will purchase large quantities of raw materials in excess of normal demand, and reserve a large amount of raw materials so as not to increase material costs and at the same time obtain a large order price discount.

In addition, it is indispensable for a positioning strategy based on inventory production and has a strategic role.

Although inventory is very important to the company, poor control of inventory can lead to insufficient or excess inventory. Insufficient inventory will result in missed deliveries, loss of customers and markets, and production bottlenecks. Excess inventory will occupy funds and the efficiency will decline. In particular, higher inventory levels will increase the cost of the company. For example, packaging companies are storing large amounts of paper due to concerns about rising paper prices, but due to the long storage time of the paper, the printing quality has been reduced, resulting in greater losses. If the amount of storage is small, the increase in paper prices leads to an increase in costs. The disadvantages caused by high inventory are mainly manifested in the following aspects:

Inventory holding costs increase. Debt interest, known interest income, taxes, insurance, management fees, rents, cleaning, maintenance, protection, etc. will all lead to an increase in the cost of possession. In particular, when the cost of ownership is high, the consequences are very serious.

Reduce the return on investment. Excessive inventory occupies a large amount of capital, the investment yield rate decreases, and the reduced investment yield translates into the financial cost through the debt interest rate.

Reduce market response speed. A large amount of WIP inventory slows down the production system, increases the execution time of production and orders, and reduces the response sensitivity to order changes.

Production coordination costs increase. Because of the large amount of inventory that leads to production system congestion, a large number of managers are required to coordinate.

In addition, if a large amount of inventory exists before the raw materials are used for production, the production capacity will be wasted. And higher in-process inventory also masks potential production issues such as quality problems, absenteeism, supplier issues, and so on.

Therefore, managers should try to balance inventory and meet production and customer needs within a reasonable range of inventory costs. The management of inventory by packaging companies is relatively simple, because it uses relatively less raw materials, most products are produced according to orders, and its inventory control is also relatively easy. A key factor in solving the inventory problem is the smooth flow of information: what companies now have and what companies need. The better the two issues are solved, the less inventory problems will be.

(Wang Yuxin)
Source: China Packaging News - Paper Packaging Weekly

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