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Accurate value: finding a place for inventory.

Article Excerpt
THE THEORY OF CONSTRAINTS (TOC) PROPOSES excess inventory is a liability to a company, yet on a firm's financial statements, inventory is entered as an asset. Inventory-dollar-days, a way to portray the implications of excess inventory on the financial health of a firm, should be used more widely. As with many philosophies emanating from industry, the ideas are sound, but have a difficult time breaking through the web of accounting rules to become part of an organization's financial reporting system. Much like Alex Rogo in The Goal by Eliyahu Goldratt had to prove to his accountants and bosses that inventory is not really an asset, operations managers continue that struggle today because in fact, inventory rests under assets. Assets are something to value.

Did you hear the one about the banker who would not give a loan to a battery distributor because the distributor kept a low inventory of his perishable product? The banker wanted more inventory for collateral. This is just what that business needed: a warehouse full of run-down batteries. At best, inventory could be considered an artificial asset, particularly if it is excess inventory.

Much of the literature about Goldratt's theory of constraints espouses that holding inventory is a liability for an organization. The message from his books is that inventory levels negatively affect quality, new product introduction, overtime, end-of-month processing, equipment, space, investment, and responsiveness to market. This is especially true of excess inventory.

Critics have suggested that inventory is not inherently bad but is a...