Manufacturers attempt to produce enough products to keep the status of their inventory static or unchanging. Whether they produce too much product, meaning their inventory grows -- or too little product, meaning their inventory shrinks -- they have unplanned inventory investments. Economists call the unplanned inventory an investment because it either costs the company money or earns money for the company. Too much inventory costs the company money due to production and warehousing expenditures. Too little inventory earns money for the company but, it could cost money in the long term due to consumers selecting another product when the product produced by the manufacturer is unavailable. Tracking unplanned inventory investment is essential to the financial health of a manufacturer.
Calculate your investment. Add the cost of any expenditure on your facility and equipment to the total cost of your inventory production. Include wage and material expenses when calculating your inventory production cost.
Total your costs of facility and equipment expenses plus your budgeted amount for inventory production to determine your planned investment.
Subtract your planned investment cost from your investment cost to calculate your unplanned inventory investment.
Increase your production if your calculations result in a negative unplanned inventory investment to supply your inventory adequately.
Decrease your production if your calculations reveal a positive unplanned inventory investment.
Tips
After calculating you unplanned inventory investments, take a close look at your inventory to determine the reason for the overage or shortage of inventory. Eliminating dead inventory -- items with no sales -- and decreasing inventory production on products that move slowly can free resources to produce more items that sell well if you produce more than one product.
References
- Oswego State University of New York: Principles of Macroeconomics Week 11
- Effective Inventory Management, Inc.: Calculating Your Target Inventory Investment
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Tips
- After calculating you unplanned inventory investments, take a close look at your inventory to determine the reason for the overage or shortage of inventory. Eliminating dead inventory -- items with no sales -- and decreasing inventory production on products that move slowly can free resources to produce more items that sell well if you produce more than one product.
Writer Bio
Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and Graphic Design and a Bachelor of Science in Business Administration from the University of Mississippi.