surplus
- A common
problem
- Categories of
surplus
- Financial impacts
The traditional
intermediaries
Author
b
The World bank estimated in 1998 that the market for all business surplus is at least $350 billion annually.
The problem is not going away. As the following tables show, despite concerted efforts by the business community to improve supply chain efficiency, inventory growth has actually outpaced sales growth.
Inventory and sales growth trends for US companies ( according to the
World bank)
Manufacturing sector
Year ending
inventoryAvg.
Monthly sales Ratio
1990 ($ billions)
399
287
1.39
1996 ($ billions)
438
310
1.41
Change
+ 10%
+ 8%
+ .02 pt
Retail sector
Year ending
inventoryAvg.
Monthly sales Ratio
1990 ($ billions)
240
184
1.3
1996 ($ billions)
314
203
1.55
Change
+ 31%
+ 10% +.25
pt
Wholesale sector
Year ending
inventoryAvg.
Monthly sales Ratio
1990 ($ billions)
196
179
1.09
1996 ($ billions)
256
201
1.27
Change
+ 31%
+ 12%
+ .18 pt
It is reasonable to assume that a good chunk of that inventory consists of excess items.
Most business surplus falls into one of three main categories:
·Finished goods inventory: it consists of items intended for resale by a manufacturer, distributor or retailer. It can include consumer items such as gift or toys or business items such as construction supplies or office equipment.
·Operating assets: operating assets are those items used by companies to manufacture goods, run their facilities or provide services. It could be, for instance, used factory machinery, row materials or supplies for MRO.
·Excess capacity and space: It is not visible like other types of surplus, but it is not less important. It could be for example production capacity or excess warehouse space.
Too much surplus creates a significant drag on the company's financial performance. It can have lot of repercussions from reduce the earnings to depress the company's stock price.
Here are some examples of the costs associated with surplus:
§Sunk cost/opportunity cost. Surplus assets represent hard dollars that the company has invested. However, in the surplus state, that asset has no value to the company. Upon conversion of that asset to cash, the funds can be invested in a productive piece of equipment or financial assets.
§Depreciation expense. Some assets can depreciate in value just sitting in a warehouse. Moreover, the longer a company hold onto assets, the greater the risk that the assets will become obsolete due to technological changes, new products etc.
§Maintenance costs. Some surplus equipment must be maintained while it sits idle to keep it in good operating condition.
§Insurance costs. Surplus inventory and operating assets must be insured against damage or destruction.
§Higher taxes. Surplus assets get counted as part of total assets,
and in many jurisdictions they can increase a company's property tax base.
