EVALUATION OF THE EFFECTS OF HOLDING EXCESS INVENTORIES

The 1980s have brought a new awareness of the negative effects of holding excessive inventories. High interest rates and the popularity of Japanese management techniques such as just‐in‐time inventory systems have focused attention on the need to reduce extra inventories. However, traditional measures of inventory quantities, such as turnover of days' sales, do not reveal the true impact of the inventory investment. In this paper a new measure of inventories, the cost of capital on excess inventories (CCEI) is proposed, along with recommendations for management use of the tool and suggestions for implementation.