2.1
Meaning of Inventory
Inventory
generally refers to the materials in stock. It is also called the idle resource
of an enterprise. Inventories represent those items which are either stocked
for sale or they are in the process of manufacturing or they are in the form of
materials, which are yet to be utilized. The interval between receiving the
purchased parts and transforming them into final products varies from
industries to industries depending upon the cycle time of manufacture. It is,
therefore, necessary to hold inventories of various kinds to act as a buffer
between supply and demand for efficient operation of the system. Thus, an
effective control on inventory is a must for smooth and efficient running of
the production cycle with least interruptions.
2.2
Reasons for Keeping Inventories
·
Meet
variation in Production Demand
Production plan changes in response
to the sales, estimates, orders and stocking patterns. Accordingly the demand
for raw material supply for production varies with the product plan in terms of
specific SKU as well as batch quantities. Holding inventories at a nearby
warehouse helps issue the required quantity and item to production just in
time.
·
Cater
to Cyclical and Seasonal Demand
Market demand and supplies are
seasonal depending upon various factors like seasons; festivals etc and past
sales data help companies to anticipate a huge surge of demand in the market
well in advance. Accordingly they stock up raw materials and hold inventories
to be able to increase production and rush supplies to the market to meet the
increased demand.
· Economies of Scale in Procurement
Buying raw materials in larger lot
and holding inventory is found to be cheaper for the company than buying
frequent small lots. In such cases one buys in bulk and holds inventories at
the plant warehouse.
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