Purpose of Inventory
Firms maintain various types of inventory at various stages of the production process. Table 10.1 describes the types of inventory and the reasons for holding these inventories. In general, firms maintain an inventory to obtain the following benefits:
Smooth Production
In some cases, demand for an item fluctuates widely, but the production capacity of the firm is fixed. For instance, if 75 percent of the firm's annual output is sold in only two months because of the seasonal demand of the product, it may not be economical or feasible for the firm to produce 75 percent of its annual output in just two months. Therefore, firms produce goods at constant rate and finished goods are stored till they are sold. For instance, sale of air conditioners is more during summers but an organization may not be capable of manufacturing required quantity during summer. Thus organizations maintain a constant production rate and a finished goods inventory. This inventory is used to cover the deficiency in manufacturing capacity during high demand periods.
Better Service to Customers
Firms hold inventory of goods to ensure quicker and better customer service. This is especially true in case of the retailing sector and online shopping portals (Refer Exhibit 10.1 for further details on inventory management in retailing). Even if the production process is temporarily stopped, the firm will be able to deliver goods to customers on scheduled dates. Besides, using the finished goods inventory, a firm can handle the increased requirements due to sudden rise in demand for its products. Machinery spare parts inventory allows organizations to repair facilities in case any machine malfunctions or breaks down and helps reduce the breakdown time.
Table : Types of Inventory and Reasons for Holding Inventory
|
Type of Inventory
|
Reasons for Holding Inventory |
|
Raw Materials
|
-
Obtaining raw materials from suppliers exactly when needed for production schedules is not always possible.
-
Quantity discounts can result from larger purchase quantities.
-
Larger shipments can result in reduced incoming freight costs and material handling costs.
|
|
Semi-finished Goods
|
-
Processing steps can be temporarily delinked, which allows flexibility in planning each step.
-
Unequal production rates of processing stations may result in process slow-down, in the absence of inventories.
-
Producing and transporting in larger batches reduces material-handling and production costs.
|
|
Finished Goods
|
-
Production of products as and when the customers demand them can be uneconomical.
-
Backlogs in customer orders may not always be allowed.
-
Maintaining stocks result in higher levels of production and lower production costs.
-
Products can be shown to customers.
|
Protection against Business Uncertainties
Firms maintain adequate level of inventory in order to operate successfully in an uncertain environment. Inventories help firms take advantage of speculative and unexpected opportunities. For instance, a sudden and unexpected increase in demand can be met with finished goods inventory. Raw material inventory is maintained to tide over expected increase in prices or anticipated scarcity in the future. Maintaining inventory enables firms to exploit speculative opportunities and also safeguards them against unusual events.
Take Advantage of Quantity Discounts
Each time a firm places an order, it incurs an ordering cost. Therefore, to minimize ordering costs, firms try to reduce the numbers of orders, by ordering more quantity than is actually needed. Many suppliers give quantity discounts i.e., the larger the size of order, the bigger is the discount and lesser is the per unit cost.
Email based Operations Management assignment help - homework help at Expertsmind
Are you searching Operations Management expert for help with Purpose of Inventory questions? Purpose of Inventory topic is not easier to learn without external help? We at www.expertsmind.com offer finest service of Operations Management assignment help and Operations Management homework help. Live tutors are available for 24x7 hours helping students in their Purpose of Inventory related problems. We provide step by step Purpose of Inventory question's answers with 100% plagiarism free content. We prepare quality content and notes for Purpose of Inventory topic under Operations Management theory and study material. These are avail for subscribed users and they can get advantages anytime.
Why Expertsmind for assignment help
- Higher degree holder and experienced experts network
- Punctuality and responsibility of work
- Quality solution with 100% plagiarism free answers
- Time on Delivery
- Privacy of information and details
- Excellence in solving Operations Management questions in excels and word format.
- Best tutoring assistance 24x7 hours