Importance Of Inventory Management

Meaning of inventory management

Inventory management means safeguarding the company property in the form of inventories and maintaining it at the optimum level, considering the operating requirements and financial resources of the business. Inventory management emphasizes control over purchases, storage, consumption of materials and determining the optimum level for each item of investments.

Importance of Inventory Management

Inventory management is concerned with keeping enough products on hand to avoid running out while at the same time maintaining a small enough inventory balance to allow for a reasonable return on investment. Proper inventory management is important to the financial health of the corporation; being out of stock

If product demand is greater than expected, inventory can be depleted with out losing sales until production can be stepped up enough to select the unexpected demand.

However inventory is difficult to manage because it crosses so many lines of responsibility. The purchasing manager is responsible for supplies of raw material and would like to avoid shortages and to purchases in bulk order take advantages of quantity discounts.

The production manager is responsible for uninterrupted production and wants to have enough raw materials and work in process, inventory on hand to avoid disruption in the production process. The marketing manager is responsible for selling the product and wants to minimize the chances of running out of inventory. The financial manager is concerned about achieving an appropriate overall rate of return. Funds invested in an inventory are idle and do not earn a return.

Nature of Inventories

Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventories that exist in manufacturing company

Stocks of raw materials and work-in-process facilitate production while stock of finished goods is required for smooth marketing operations. Thus, inventories serve as link between the production and consumption of goods.

Need to hold inventories

Maintaining of inventories involves trying up the companies and incurrence of storage and handling cost. There are three general motives for holding inventories.

Transaction motive

It emphasizes the need to maintaining inventories to facilitate smooth production and sales operation.

Precautionary motive

It necessitates the holding of inventories to guard against risk of unpredictable changes in demand and supply force and other factors.

Speculative inventories

It influences the decision to increase or reduce inventory level to take advantage of price fluctuations. The firm should always avoid a situation of over investment or under investment in inventories. The major dangers of over investment in inventories are

i. Unnecessary tie up of the funds and loss of profits. ii. Excessive carrying cost. iii. The risk of liquidity.

The consequences of under investment in inventories