Inventory Management refers to fixation of minimum and maximum limits, determining the size of inventory to be maintained. Consideration regarding issue prices, norms of receipts and inspection, determining the EOQ, providing proper store facilities and keeping an effective check on obsolescence are some of the considerations which are covered under inventory management. Inventories are the goods which will be sold in future in the normal course of business operations.
Coverage of Inventories
The coverage of inventories are:
Raw Materials. This is the basic Raw Material which will be used for production.
Work-in-Progress. It is the next stage of Raw Materials which have been applied to the production process but have not completed the process.
Finished Stock. These are the final products available for sales made out of Raw Materials.
Benefits of Holding Inventory
Holding inventories is useful to a firm in the process of purchasing, producing and selling. The firm which does not hold adequate inventory of Raw Materials and finished goods there are chances will lose customers or delay in supply goods as per their orders. following are the benefits of holding adequate inventories:
(i) Customers Service. A company who has sufficient reserves of stock will not lose customers and will supply goods within a reasonable time thus it can serve the interest of their valued customers.
(ii) Discount facility. There is a possibility of heavy purchases of Raw materials and finished goods will result in heavy discount facility.
(iii) Lesser ordering cost. When a company purchases Raw-materials and finished goods in heavy quantities they reduce the ordering cost in terms of typing a new order, checking, approving, telephones, mails etc.
(iv) Reduction in set-up costs. Maintenance of adequate inventory is useful to a company as it will benefit in setting-up cost of production which further result in lesser per unit cost of output.
(v) Continuous Production Schedule. Proper stock of Raw-material not only benefit the company of cash discount and render cost but also useful production scheduling. Adequate inventory is useful to production schedule which ultimately keep its supply regular and meets the required demand of its valued customers.
(vi) Employment stability. Adequate inventory is useful for employment stability as it co-ordinates production and distribution and ensures job stability. When adequate inventory is not kept, it is a possibility that production will suffer and employment stability will be in danger.
(vii) Reasonable return on Capital Employed. When inventories are more than the required it will mean that the company has used its funds in such lines from where no return will be earned. The liquidity will suffer and thus it is recommended that adequate inventory be maintained.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.