NEED FOR HOLDING OPTIMUM INVENTORY

Need for Holding Optimum Inventory

Though inventory of materials is an idle resource (as they are not used immediately and stocked for future use), almost every business must maintain it for efficient and smooth running of its operations. If an enterprise has no inventory of material at all, on receiving a manufacturing order, it will have to place order for purchase of raw material, wait for arrival and receive of material and then start production.

            The customer will have to wait for a long period for the delivery of his product and may frustrated and turn to another manufacturer. Maintaining of inventory becomes necessary for the following reasons:.

·         It helps in smooth and efficient running of the production system and the enterprise. It decouples the production from the customers and vendors.

·         It provides services to the customers at a short notice. Timely deliveries may increase the goodwill of the company.

·         In the absence of inventory, the enterprise may have to pay very high prices because of piecemeal purchasing. Maintaining inventory may earn price discounts on bulk purchases. It also takes advantage of favorable market.

·         It reduces the product cost, since there is an added advantage of batch production and mass production runs.

·         It acts as a buffer stock when raw materials are received late and shop rejects are too many.

·         Bulk purchases reduce the number of orders and hence less clerical work.

·         It helps in maintaining economy by absorbing some of the fluctuations when the demand for an item fluctuates or is seasonal