Financial Accounting: IFRS, 3rd Edition

CHAPTER 6 Inventories

FEATURE STORY “Where Is That Spare Bulldozer Blade?”

Let’s talk inventory—big, bulldozer-size inventory. Komatsu Ltd. (JPN) is one of the world’s largest manufacturers of giant construction and mining equipment. The company’s name is actually somewhat ironic, since komatsu is Japanese for “small pine tree.” But, there is nothing small about what Komatsu does. It produces many types of earthmoving equipment: excavators, forestry equipment for hauling giant logs, forklifts, metal presses, and lots of other really big things. It is the second largest seller of heavy equipment in the world. And, as the chart below shows, it sells this equipment in every region of the world.

How does a company remain profitable if it sells so many different products, many of them giant, all over the world? To be profitable, the company needs to effectively manage its inventory. Imagine what it costs Komatsu to have too many D575 bulldozers (the largest bulldozers in the world) sitting around in inventory. That is something the company definitely wants to avoid. On the other hand, the company must make sure that it has enough inventory readily available to meet demand, or it will lose sales.

Komatsu’s inventory management expertise has helped it meet many challenges, including Japan’s recent tsunami. In fact, Komatsu is so good at managing its own inventory that it actually ...