FIN.3:4.3 - Compare inventory policies at the service they provide

For a proposed reduction in stock, distinguish a one-time run-down from a lower steady operating requirement. Selling down existing units without replacing them can release cash during transition, but the lower inventory cannot be released again each year. A recurring improvement may instead reduce spoilage, storage or replenishment costs. Conversely, smaller batches may raise ordering and transport costs or require more supplier responsiveness.

Recover purchase cost, expected realizable proceeds and the payments actually avoided. A fall of 20 in book inventory is not necessarily a receipt of 20: a write-down is noncash, clearance may realize less, and supplier balances may change at a different date. Compare the cash account under both policies through transition and subsequent replenishment. Preserve the continuing stock needed to support the stated sales.

Include lost contribution and recovery costs when stockouts or quality failures are plausible. A service level can be an operating constraint, not a price to be guessed by finance. If operations supplies several feasible service/cost combinations, compare their incremental value and liquidity with explicit uncertainty. Keep resource usage, capacity supplied and expenditure distinct: releasing storage space saves cash only if the space or a related purchase can actually be reduced or redeployed. MA.5 and the actual operating plan supply that distinction.