MOTIVES FOR HOLDINGS INVENTORIES

Motives for Holdings Inventories

Economists have established three motives for holding inventories.

1. Transaction motive.
2. Precautionary motive.
3. Speculative motive.

1. Transaction motive – Firms may require holding certain amount of finished products perpetually in stock for display or demonstration purpose. They may also hold inventories to meet a sudden demand, thus reducing the delivery tags.

 

2. Precautionary motive – Firms may hold inventories for fear of stock outs and losing its goodwill. Some of the precautionary motives give rise to ‘safety stock’ to deal with uncertainty in supply and demand.

3. Speculative motive – A firm may also hold both raw materials and finished products when it expects a price in future, thereby realizing a stock profit. Inventories held for speculative motive are termed as profit-making inventory.

Of the three motives, Precautionary motive requires much attention. Besides accumulation of inventory due to the three motives mentioned above, inventories also get accumulated because of inefficient management of working capital. This type of inventory is called, Flabby inventory.