Excess Capacity and Excess Inventory Problems

The cement industry has now been experiencing a threat called Excess capacity where supply and demand are not in line. This problem of overcapacity has been experienced by many other industries throughout the year and yet its continuing to be tormented for many.

Fortunately India's economy relies on the housing industry and in no way deceiving the cement sector as demands for home are not going to fall, but expecting to have a tremendous growth in coming years.. Also the infrastructure industry has been on the rise, still the rate of consumption is not enough to slow down the over-built capacity.

Manufacturing units are more than 5000 today. It has been tough times for many cement top players like ACC gave negative returns of about 16 %, UltraTech gave about 7.5%, Ambuja gave about 19.6 %. Due to the political commotion, lack of export and reduced Oil prices over the last few years were one of the main reason for the cement demand in Middle East Countries.

Excess inventory can be a pain point to many process industries/ manufacturing units and occur over s certain period of time but why to scrap when your unused/idle Inventory can earn maximum revenues.

The linear economic model is reaching its physical limits. In this linear model, goods are manufactured from raw materials, used by the consumers and the materials are finally discarded as waste after its useful life.

Any system based on consumption rather than on the restorative use of resources entails significant losses along the value chain. Furthermore, the rapid acceleration of consumptive and extractive economies since the start of the twentieth century has resulted in an exponential growth of negative externalities.

What cause this excess capacity?

• Demand Constraints
• Poor Market Analysis
• External Crisis (Environmental or financial crisis)
• Advanced Technology
• Industry Dependencies
• Sharing of market demand among many firms
• More Competition

Why it is a considerable factor?

If a product can’t be sold above its production cost, there are some challenges to be met like low profitability, wage cut down and minimum realization for a product etc... And in other case if a product can’t be sold, obviously all the production effort such as resources, time, money etc gets wasted. Either way it is going to hurt the business which in turn hurting the overall industry and economy.

Also this industry forgetting another threat of excess and idle inventory. Suppose if a plant is shutting down due to this excess capacity, all the industrial spare parts involved are remained to sit on the shelf selling for low realization and scraping it. Idle inventory is not something that already lost, but it brings more loss in future too like maintaining costs, liquidating costs etc..

Managing excess/obsolete inventory is considered to be the great risk factor. A lot of old stock are a notice sign that industry is in absolute loss. These are all the results of poor management of products list, poor estimation, poor demand estimation, over estimating etc.

Moreover, if you continue to make the product without considering the above metrics, then whole industry is going to suffer.

Priyanka shankar, market research analyst also a business writer. Love to write about process industries, excess inventory, excess stock dealing etc..