Inventory: Where and How?

“In the past two years my company never had inventories exceed six weeks of sales," manager of a packaging company in southern Vietnam said. Low inventory is normal for a company trading seasonal farm commodities.

 

“Previously, the company allowed cultivation at the wrong time to boost sales. However, high risks of interest rates and debts force the company to scale down operations at present to live through this rough time,” he said, adding that “Slow sales force us to lower inventories.”

 

In contrast, reports from Vietnamese governmental agencies raised concerns over growing inventories. The General Statistics Office (GSO) used to warn that a normally developing economy should have a reasonable inventory rate of 15 - 17 per cent.

 

However, recent statistics show no similarities. The inventory index of processing and manufacturing industries always exceeds 15 - 17 per cent over the past one year, peaking at nearly 35 per cent at the start of the year. As of November 1, 2012, the value stayed at 20.9 per cent, higher than the data announced one month earlier.

Facing this reality, the Ministry of Industry and Trade put forth solutions to deal with inventories stocked by companies and recommend businesses to consume commodities of each other. However, recently, it is noted that inventories are not common, even not worrying in most companies.

 

“Inventory index in manufacturing sector is unlikely to increase significantly," said Dr Luong Van Khoi, head of World Economic Department under the National Centre of Socioeconomic Information and Forecasting (NCEIF). He said given strong export growth, declining import and low credit for production in 2012, there is little possibility of high inventories.

 

His view was supported by businesses. According to a recent NCEIF survey which interviewed more than 900 businesses in key economic areas such as Ho Chi Minh City, Hanoi, Da Nang and Bac Giang, up to 66.4 per cent of respondents said their inventories were normal, only 15.1 per cent said above the normal; and 9.1 per cent said below normal.

 

“Now, it is quite certain that the stock of finished products at manufacturing companies in the country is not worrying, and may not even be a problem, as we were previously informed,” Khoi noted.

 

According to experts, inventories are not evenly spread throughout the entire economy, but concentrated on some poor-performing industries. “Inventories are still very high in real estate and related industries like building materials," said Dr Vo Tri Thanh, deputy director of the Central Institute for Economic Management (CIEM).

 

Tran Anh Vuong, Deputy Chairman of the Hanoi Young Business Association, said high inventories cause numerous difficulties for these companies. Firstly, the value of assets shrinks because of lower prices. Secondly, debts balloon because of monthly interest rates paid for inventories. Thirdly, no revenue is earned because of low sales. As a result, hardships worsen.

 

Nevertheless, another reality is that some companies have no or little inventory. Vuong said although businesses have low inventory, their debts are huge because they have not collected debts from goods sold to other companies.

“Big debts and non-recoverables are even more dangerous than high inventory because they carry more risk of bad debts,” he said.

 

Sharing this point of view, Dr Vo Tri Thanh noted that an alarming inventory is VND90 trillion worth of bad debts in construction industry, which is hampering production and business activities of construction companies. Dr Nguyen Duc Kien, Deputy Chairman of the National Assembly's Economic Commission, added that the aforementioned outstanding debt of basic construction industry accounts for half of total annual budgetary investment. This causes imbalance of central and local budgets. "The government says that all outstanding debts of basic construction industry must be paid off in 2015. But, how to pay remains unknown,” he added.

 

For the time being, bad debts owed by businesses to banks are countable but the amount of bad debts businesses to other businesses remains uncountable. Legal problems and procedures balloon these loans while they hardly claim debts through court.

 

Remarking on this issue, Deputy Minister of Planning and Investment Dang Huy Dong said "We still mention high inventory but we do not state where bad debts are. Thus, solutions are easily deflected. "