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Inventory refers to those idle resources
which have economic value and thus it may be defined as usable but idle resources that have
economic value. Inventory is a stock of direct or indirect
material , from raw material to finished goods stocked in order
to meet an unexpected future demand. In other words inventory is
a physical stock of goods kept for the future purposes.
Inventory is expressed in terms of both quantity and monetary
value. In terms of quantity , it can be expressed as the number
of units of an item lying where as in monetary terms it is the
sum total of the monetary value of all its items.
Inventory Management or control refers to maintaining , for a given financial
investment, an adequate supply of something to meet an expected demand pattern. It thus deals with determination of optimal policies and procedures
for procurement.
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Functions of Inventory :
Though Inventory is blocked capital , in the sense that it is not being used
in the present, it plays a distinct role in the life of any organisation in
order to ensure smooth and efficient running of business. For example, if a
firm does not have any inventory then as soon as it receives a supply order
it will look for raw material to manufacture the items and thus the
customers shall be kept waiting. It alone may cost the firm its customers
who may not like to wait. Further, all the internal agencies shall have to
work in emergency for getting the material, completing the production etc.
if there is no inventory. Inventories decouple individual phases of the
total operation. Thus the functions of inventory are to :
* protect against unpredictable fluctuations in demand and supply
* take the advantage of price discounts through bulk purchases |
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* take the advantage of batches and longer production
run
* provide flexibility to allow changes in production
plans in view of changes in demands etc.
* facilitate intermittent production
The basic function of inventory is thus to insulate the production process from
changes in the environment. It decouples various interlinked functions and
thus enables each function to conduct itself independently like Purchasing ,
Production, Marketing etc.
Why Inventory goes up or down ?
There are several reasons , the most important for a
high inventory being a
*high Lead time
*Tendency to play safe
*Stock outs and shortages lead to criticism |
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*Standardisation and variety reduction not given emphasis
*Uncertainty / scarcity of items triggering over stocking
Why Inventory needs to be optimally used ?
Inventory is Blocked money , the working capital.It has a cost (approx.
20% of Average inventory)
Opportunity cost of investment funds : Investment in external
securities/Equipments can earn a return for the company
Insurance cost : Inventory is an asset needing insurance
Storage costs : Cost is associated just for storing
an item. When large number of items are stored the following
also become costs that can not be ignored:
Obsolescence and deterioration
Damage, pilferage or obsolescence |
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