Operations Management

Both of these departments have differing opinions as to whether it can be considered an asset or a liability to the organisation. The accounts department considers inventory to be an asset because it sees an asset as something a company owns and a liability as something a company owes and these viewpoints lead them to consider inventory as an asset. However production managers and the like consider an asset to be something that has a greater worth than its cost to produce meaning it will generate income for the organisation. Production managers in turn consider anything that's cost is potentially greater than the income it can generate creates a loss for the organisation and so renders it a liability. One of the biggest reasons for this conflict of opinions is that of excess inventory. Marketing want inventory to enable a fast response to customers, production want excess inventory to improve machine utilisation and improve labour efficiencies whilst also avoiding unfavorable labour variances, purchasing want this inventory to buy in bulk and get a discount price and production planning want this type of inventory to utilise capacity in the shop. All of these departments can in turn affect the inventory from the raw material stage right up to the finished product.

These departments find this excess inventory attractive as it makes the performance measures look good regarding income. However accounts staff realise that the balance sheet gives a truer reflection of the companies worth through detailed analysis. This analysis of course is only as good as the methods employed and the methods available for utilisation are of limited use when dealing with excess inventory. When accountants value excess inventory they use one of two ways .The first of these ways is market value. This is not a very practical way of valuing inventory as an ongoing valuation method. The second is by way of cost value. This again is not a foolproof method because the product remains in the inventory until it is actually sold. Activity based costing, direct costing and the Theory of constraints are other methods that the accounts department have at their disposal but all of these methods seem to deal with overheads which of course are usually subject to many variances.

These variances then in turn discourage the method of detailed analysis in arriving at the companies' value. This allows the figures to be massaged to a certain extent to make their initial figures and forecasts look preferable. Simple changes in working processes and attitudes of production managers, purchasing agents and accounting staff should be explored and acted on to lessen if not eradicate the need for having an excess inventory by operating more efficiently causing less cost and waste thus taking away the need for overblown valuation of the company by creative accounting. All departments must work together to create the right mix through communication and a thorough understanding of what each department is striving to attain and how this understanding will allow the company to reach its goals on profitability revenue created through sales giving a true statement of the company worth.