“If you can’t describe what you are doing as a process,
you don’t know what you’re doing”
W. Edwards Deming

Inventory Modelling

Inventories are short term assets held as part of an organisation’s core business operations.

Inventory management is an important part of working capital management. Where inventory levels are significant, a good model should show the impact on cash of holding such significant levels.

We will look at how to model three types of inventory: raw materials, work in progress and finished goods.

Comments

  1. Hi Mark,

    Thank you for your valuable feedback. Great to learn that you like our content.

    We agree with that we can put the focus on purchases which are further driven off future sales. However, it’s worth noting that certain industries work off purchases through cost of goods sold, while others through future sales.

    From modelling perspective, it’s quite same as the existing modelling of inventory shown in ‘Inventory Modelling’ handbook. To calculate purchases from future sales, we can first forecast the future sales (taking into consideration factors such as, seasonal aspect, inflation, historic growth et al), based on which, the purchases required at each stage can be computed by taking care of average turnaround time for raw material, work-in-progress and finished goods respectively.

    Hope this helps you.

  2. Mark Gandy says:

    I work a lot in retail and eCommerce. First, great content, but in these industries, we have different types of inventory: fast moving, slower moving, and one-off purchases (seasonal and great deals on close-out purchases from vendors as an example). Obviously, there are others.

    Might want to consider different calculation blocks for the way the business owners segment inventory.

    Conceptually, I find inventory modelling frustrating as the focus is generally on nailing down the ending balance (I do it the way you show in your framework). Accordingly, purchases becomes the plug figure since we know beginning inventory, COGs, and then ending inventory based on average days in warehouse.

    What if we put the focus on PURCHASES whereby PURCHASES is driven off future sales? That way, it’s easier to align business strategies and tactics with the model design.

    Love all of your content – very well done!

    • Hi Mark – thanks so much for your comments. It’s good to hear that you like what we are publishing and it is clearly prompting further thought.

      If I understand you correctly, then both COGS (based on current period sales volume) and PURCHASES (based on, say, next period’s sales volume) would be calculated by the model. In which case the plug figure becomes the ending balance. I see no reason why this should not work.

      Might you be interested in writing a guide for the handbook?

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