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.

OPERATING OBJECTIVE

OBJECTIVES OF INVENTORY MANAGEMENT

The objectives of the inventory management are discussed under two heads:

Ø  Operating objectives.

Ø  Financial objectives.

OPERATING OBJECTIVES: -   The operating objectives of inventory management is further divided as follows:

• Availability of materials: - The first and the foremost of inventory management is make all types of materials available at all times they needed by the production departments. So that the production may not be held up for want of materials. It is therefore advisable to maintain the minimum quantity of all types of materials to move on production schedule.

• Minimizing the wastage: - Inventory management has to minimize the wastage at all levels that is during its storage in the go downs or at work in the factory. Normal wastage, in other words uncontrollable wastage, should only be permitted.

• Promotion of manufacturing efficiency: - The manufacturing efficiency of the enterprise increases if right types of raw material are made available to production department at the right time. It reduces wastage & cost of production & improves the moral of workers.

• Better service to customers: - In order to meet to the demand of the customers, it is the responsibility of inventory management to produce sufficient stock of finished goods to execute the orders received from customers.

• Optimum level of inventories: - Proper control of inventories helps management to procure materials in right time in order to run the plant efficiently. Maintaining the optimum level of inventories keeping in view the operational requirements avoids the out of stock danger.
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FINANCIAL OBJECTIVES: - The Financial objectives of Inventory management is further divided as follows –

·         Economy in purchasing: - Proper inventory management system brings certain advantages and economies in purchasing the raw materials. Management makes every attempt to purchase raw materials in bulk quantity and to take advantage of favorable market conditions.

• Optimum investment and efficient use of capital: - The primary objective of inventory management, from financial point of view, is to have an optimum level of investment in inventories. Inventory management has to setup minimum and maximum levels of inventories to avoid deficiency or surplus stocks.

• Reasonable prices:- Inventory management has to ensure the supply of raw materials at a reasonable low price, but without sacrificing the quality it helps to reduction of cost of production and improvement in the quality of finished goods in order to maximize the profits of the organization

• Minimizing the costs: - Minimizing inventory costs such as handling, ordering and carrying costs etc is one of the main objectives of inventory management. It helps in reduction of inventory costs in a way that it reduces the costs per unit of inventory and there by reduction of total cost of production.