In periods of high interest, defining which products to have in stock becomes an even more refined task from a financial point of view. This is because the higher the interest rate, the greater the cost of inventory associated with the product, since, with greater profitability, the better are the opportunities that remunerate the capital of companies (Selic rate went from 2% in early 2021 to the level of 13% in the second half of 2022).
Figure: Evolution of the Selic rate. Source: Central Bank of Brazil, ILOS analysis
At times like this, it is necessary to carefully assess the risks of having a certain product in stock, given that, in financial terms, there is a risk that the company will buy the raw material, use resources to transform the item, have several other operating expenses so that, in the end, it is not sold or is sold with a lower financial return than that offered by low-risk investments offered in the market.
In order to minimize the cost of excess inventory, it is important to base the decision making considering the balance of this cost of excess with the cost of unavailability of products (which generate the cost of shortages and the cost of haste).
In most businesses that are based on selling products, the cost of shortages is nothing more than the contribution margin that the company fails to earn by not having a certain item available for sale. In the case of maintenance service companies, the lack of MRO can lead to loss of sale of the maintenance service, causing the company to stop earning both on the sale of the item and on the sale of the service (in addition, there are cases in which the company needs to pay a fine in the contract for not meeting the customer's demand).
The unavailability of stock can also generate what is known as the cost of haste. This cost happens when there is a lack of stock and the company has to run out to meet it. This unscheduled process increases the company's inefficiency, generating extra costs with emergency freight between facilities, air freight, extra production shifts, etc.
Therefore, it is essential to assess the costs of unavailability of products, comparing these costs with the possible costs of excess inventories.
UNAVAILABILITY COSTS VERSUS EXCESS INVENTORY COSTS
For items with unavailability cost greater than excess cost, it is worth having a plan that minimizes the item breakage since when sold it can contribute positively to the company's result or if it is missing it can generate additional bitter costs to the company. Therefore, care must be taken to have a structured policy for this item so that the company does not have sales and margin losses. In this case, you should minimize stockouts.
For items with unavailability cost less than excess cost, means that the cost of keeping that product in stock is greater than the loss generated by having a stockout (cost of lost sales or cost of rushing to obtain the product). In this case, it is essential to minimize or even eliminate inventory, when evaluating strictly the financial result generated by this type of product. However, even in this case, companies can choose to keep these items in stock for strategic reasons, such as not losing market share, not losing sales of other products in the portfolio, since products with small margins can stimulate the sale of others of the brand, a need in meet services agreed in contract etc. Therefore, it is important to know the company's strategy in detail, and it is at this moment that the assessment of the cost of haste becomes even more relevant.
LIST OF NUMBER OF FACILITIES AND STOCK
One of the alternatives to reduce the stock of items that generate “loss” to the company's operation is to define the smallest possible number of facilities where the company will make the product available, since the smaller the number of facilities, the smaller the demand variability. of the service facility and, consequently, the safety stock for each facility will be smaller. The tendency is that the more centralized the stock of the product in the company's logistics network, the lower the total stock of the item will be.
In short, in economic periods with high cost of capital, the cost of keeping products in stock becomes a relevant offender for companies. For this reason, the analysis between the different business costs and the relationship between them must be understood in order to achieve the intrinsic strategy of each company.
References:
- https://ilos.com.br/web/cursos/online/online-ao-vivo-gestao-de-estoques-na-cadeia-de-suprimentos
- https://ilos.com.br/web/juros-e-recessao-inimigos-do-custo-de-estoques
- https://ilos.com.br/web/estoque-custo-de-oportunidade-e-impacto-sobre-os-indicadores-financeiros
- https://plannera.com/a-pizza-da-incerteza-e-o-sop/
