Ammo Shortage, JIT inventory systems, and taxes

[AZRedhawk44]

We've discussed this before tangentially, but never as a cohesive topic.


Back from WWII through Vietnam, there were a lot more ammo manufacturers in the US than there are today.

The Cold War pretty much killed off a lot of those manufacturers once the Cold War ended and all the various stockpiles of small arms cartridges needed to be liquidated.  Cheap surplus ammo flooded the market and it made no financial sense to manufacture ammo.

Add to this, the tax notion that idle inventory was somehow considered to be a hidden profit that needed to be taxed, rather than an operating liability that needed to be safeguarded, housed, accounted for, marketed and distributed.

The response to this is the Just-In-Time inventory model.  The entire world seems to get by with little more than about 2 weeks worth of supplies at any given time.  As demand for a particular product increases, the Invisible Hand talks to a network of computer systems and informs manufacturers to increase production.

However, we the consumers are being hurt by the JIT model.  Look at ammo prices today.  And scarcity.

And we did it to ourselves, by having a tax code that punishes a company for having inventory, rather than rewarding it.

I think overstocked inventory should not be considered a taxable asset.  The company didn't get that inventory for free (they had to invest in raw materials to produce it), and the company has no guarantee that the inventory will sell for the anticipated price they would ideally expect (making the tax rate of the asset rather questionable from a logical standpoint, without price fixing).

[Fitz]

We've discussed this before tangentially, but never as a cohesive topic.


Back from WWII through Vietnam, there were a lot more ammo manufacturers in the US than there are today.

The Cold War pretty much killed off a lot of those manufacturers once the Cold War ended and all the various stockpiles of small arms cartridges needed to be liquidated.  Cheap surplus ammo flooded the market and it made no financial sense to manufacture ammo.

Add to this, the tax notion that idle inventory was somehow considered to be a hidden profit that needed to be taxed, rather than an operating liability that needed to be safeguarded, housed, accounted for, marketed and distributed.

The response to this is the Just-In-Time inventory model.  The entire world seems to get by with little more than about 2 weeks worth of supplies at any given time.  As demand for a particular product increases, the Invisible Hand talks to a network of computer systems and informs manufacturers to increase production.

However, we the consumers are being hurt by the JIT model.  Look at ammo prices today.  And scarcity.

And we did it to ourselves, by having a tax code that punishes a company for having inventory, rather than rewarding it.

I think overstocked inventory should not be considered a taxable asset.  The company didn't get that inventory for free (they had to invest in raw materials to produce it), and the company has no guarantee that the inventory will sell for the anticipated price they would ideally expect (making the tax rate of the asset rather questionable from a logical standpoint, without price fixing).

I'm intrigued by your idea and would like to subscribe to your newsletter.



Yeah... property taxes in general piss me off. I understand the necessity of some, but some places take it way too far.

[RevDisk]

I always thought inventory taxes were insanely stupid. Because yes, they lead to having bare minimum stock on hand and all kinds of logistic issues.

Bad for businesses, bad for consumers, and bad for national security if we can run out of widgets at the drop of a hat.

[HankB]

I'll bet inventory taxes - especially on small businesses - are one reason some states have so many storage facilities.

[Fly320s]

We need ammo stockpiles to prevent global warming. It is for the children!

Maybe we can get the liberals on board by saying that JIT contributes to globular warming.

JIT means More Deliveries means More Trucks means More Pollution means Al Gore IS God Global Warming Climate Change.

[Brad Johnson]

Well, you could say JIT was the result of taxation, or…..

You could say it:

1. Reduces overall capital investment in non-producing space (i.e. Warehouse)
2. Reduces manpower demands needed to operate said non-producing space
3. Reduces ongoing operational expenses required for maintenance and upkeep of said non-producing space
4. Reduces resources tied up in non-performing materials that will be housed in said non-producing space
5. Reduces supply-side inventory write-offs in the event a product is no longer marketable
6. Maximizes production flexibility
etc...
etc...
etc...

So, again, you could say it was the result of taxation, or you could take off the conspiracy-theory blinders and call it what it really is… ... a better business model for capital-strapped small to medium volume manufacturing firms that want to reduce capital investment expenses, minimize overhead and ongoing operational expenses, maximize flexibility, and generally max out the net revenue potential for their given financial wherewithal.

Brad

p.s. The taxation theory only works in locales that assess a production inventory tax.  Not all do.

[T.O.M.]

I had a college professor who said inventory is a liability in most business models, as it requires expenditure beyond the cost of production with no benefit.  With improved inventory tracking, faster and more accurate communications, and the ability to transport easily, the need for large inventory is minimal...until demand increases beyond expectations and your inventory is depleted faster than manufacture can produce more goods. Then you get backorders, and you're working behind the curve. Great short term plan to maximize profit in the short term, but poor long term planning.

[Brad Johnson]

... need for large inventory is minimal...until demand increases beyond expectations and your inventory is depleted faster than manufacture can produce more goods. Then you get backorders, and you're working behind the curve. Great short term plan to maximize profit in the short term, but poor long term planning.

Not really.  It maximizes profits long-term by presuming short-term demand exceptions are just that, exceptions.  Holding inventory for exception periods ties up resources and dollars in non-performing reserve product that must be stored until exceptional demands potentially arise.  Now you have storage expenses (and probably interest on borrowed money) for inventory that may or may not prove useable/sellable.  Losing a few sales during rare exception periods is cheap compared to the ongoing expense and risk of maintaining an unnecessary standing reserve inventory.

Brad

[Perd Hapley]

What Brad said. JIT is what businesses would have been doing all along, had communication and transportation been as reliable and cheap as it is today.

The Cold War pretty much killed off a lot of those manufacturers once the Cold War ended and all the various stockpiles of small arms cartridges needed to be liquidated.  Cheap surplus ammo flooded the market and it made no financial sense to manufacture ammo.

Do you mean to say that the Cold War killed them, or the end of the Cold War killed them?  

[Marnoot]

JIT is what businesses would have been doing all along, had communication and transportation been as reliable and cheap as it is today.

This. JIT didn't come about because of taxes. Inventory sitting in a back room or a warehouse represents invested money that's bringing no returns.

It's true that JIT doesn't deal well with sudden unexpected demand, but for most retail businesse that situation is uncommon enough that the benefits of JIT significantly outweight the shortcomings.

[roo_ster]

The math works in favor of Brad's argument.  Too bad we are not mathematical models in econ textbooks.

There are plenty of non-math reasons (at odds with economic theory) to hold inventory, one of the biggest is that it helps keep customers happy.  The get it when they want it, not two weeks from now(1) or not after the rice mill has been idled for a couple days.  Then, the inventory-holder can swoop in, save the day, and steal business from The Evil Empire Grainger because those Yankee suckholes won't keep at least one of every sort of relay my customer needs in his mill(2).

Taxes on inventory erodes the holding of inventory at the margins.  Just like every other economic (dis)incentive.



(1) "This place is a GD geographical oddity, it is two weeks from everywhere!"

(2) Example based on actual experience, not math from an econ textbook.

[Marnoot]

Problem is, to retain that inventory the business won't be running as "leanly", will have lower margins (even assuming no inventory taxes, as they'll have more cash tied up in inventory), and in turn have to charge more for their product.

Since most customers care more about the price than loyalty to any particular business, they'll buy from JITCo 9 out of 10 times, and only buy from Non-JIT, Inc., when they want that one product JITCo is out of.

They may be happier with Non-JIT, Inc., but they'll simply spend more money at JITCo.

[Balog]

MBA's (or internet wannabe MBA's) spouting nonsense that either 1. looks good on paper or 2. works great at increasing the MBA's stock options while destroying the viability of the company are the bane of modern American business.

Regardless, the inventory tax removes the possibility of holding inventory from those businesses that would otherwise do so.

[Balog]

Ah yes, the old "screw your customers, they'll always come crawling back" model.

[Marnoot]

Regardless, the inventory tax removes the possibility of holding inventory from those businesses that would otherwise do so.

I'm not disagreeing with that. JIT is not a one size fits all solution. But saying JIT is only because of taxes is just not correct. There are businesses where holding certain amounts of inventory in reserve makes sense, and those where it's a complete waste of money. For the latter, JIT makes sense.

[Levant]

We've discussed this before tangentially, but never as a cohesive topic.


Back from WWII through Vietnam, there were a lot more ammo manufacturers in the US than there are today.

References?  Particularly that might support that more ammo manufacturers manufactured more ammo then than now.

And we did it to ourselves, by having a tax code that punishes a company for having inventory, rather than rewarding it.

Maybe you did it.  I didn't. :) 

I think overstocked inventory should not be considered a taxable asset.  The company didn't get that inventory for free (they had to invest in raw materials to produce it), and the company has no guarantee that the inventory will sell for the anticipated price they would ideally expect (making the tax rate of the asset rather questionable from a logical standpoint, without price fixing).

I agree.  Make it so.

[Perd Hapley]

Ah yes, the old "screw your customers, they'll always come crawling back" model.

Actually, no. It's pleasing most of the customers, most of the time, at lower prices.

[Tallpine]

I had a college professor who said inventory is a liability in most business models

I don't know what kind of professor he was supposed to be, but certainly not accounting or finance 

There's a reason why "assets" and expenses are both debits: they have to be paid for somehow.  You pay for them either by investing equity, by borrowing ("liability") which is also called "leverage", or from revenues.  The credit side explains how you paid for everything on the asset/expense side.

Even cash in the bank is an "expense" that you have to pay for.  Otherwise you take the money and run.

Taxes on inventory are yet another expense to add to the cost of maintaining inventory.

[T.O.M.]

I don't know what kind of professor he was supposed to be, but certainly not accounting or finance 

Business Administration, which I studied for one semester only.

[Jim147]

Being self employed, inventory is a very hard part of the job. if you know you are going to be using 35/5 and 45/5 caps during the summer and ignitors in winter, you stock them. You will get stuck with something on December 31st.

Higher ticket items become much harder. Random control boards, no. I can have most of them the same or next day and the warehouse can eat the tax. Multi horse fan motors, yes. They do cut profit margin to the bone but they do get used. Jugs of refrigerant, don't even get me started.

While the tax does suck, I have had to set my business and even back twenty years ago my department to have an inventory that gave the most profit.

The basis of low overhead is sound as long as you can get the customer working until to correct part comes in. Something I am know for around here. That would vary greatly by industry.

jim

[Balog]

Actually, no. It's pleasing most of the customers, most of the time, at lower prices.

Theoretically.

[Tallpine]

Business Administration, which I studied for one semester only.

"Liability" in accounting terms has a specific meaning, not a generic meaning like "my old truck is a liability."

[cordex]

It's not just MBAs that like JIT.  Grab a random Joe from the street and chances are he doesn't just like the idea, he lives it religiously.

If taxation were truly the driving issue, one would think that most individuals not subject to inventory taxes would manage their own large standing inventory of necessary items.  Yet the vast majority of people choose to live their lives in a state of perpetual just in time inventory for nearly everything, and for largely the same reasons as business do so.  Sometimes it results in catastrophe, but most of the time people like the results.

[Perd Hapley]

Theoretically.

OK, which suppliers have displeased you with their JIT practices?

[roo_ster]

It's not just MBAs that like JIT.  Grab a random Joe from the street and chances are he doesn't just like the idea, he lives it religiously.

If taxation were truly the driving issue, one would think that most individuals not subject to inventory taxes would manage their own large standing inventory of necessary items.  Yet the vast majority of people choose to live their lives in a state of perpetual just in time inventory for nearly everything, and for largely the same reasons as business do so.  Sometimes it results in catastrophe, but most of the time people like the results.

Marginal effects.  When there is a small (dis)incentive, you will see the effect at the margins.  Those married to JIT will not care, those who hold inventory to please their customer base will suck it up and pass along the cost+.