If there is a price increase
expected few months down the line due to changes in demand and supply in the
national or international market, impact of taxes and budgets etc, the
company’s tend to buy raw materials in advance and hold stocks as a hedge
against increased costs.
Companies resort to buying in bulk
and holding raw material inventories to take advantage of the quantity
discounts offered by the supplier. In such cases the savings on account of the
discount enjoyed would be substantially higher that of inventory carrying cost.
·
Reduce
Transit Cost and Transit Times
In case of raw materials being
imported from a foreign country or from a far away vendor within the country,
one can save a lot in terms of transportation cost buy buying in bulk and
transporting as a container load or a full truck load. Part shipments can be
costlier.
In terms of transit time too,
transit time for full container shipment or a full truck load is direct and
faster unlike part shipment load where the freight forwarder waits for other
loads to fill the container which can take several weeks. There could be a lot
of factors resulting in shipping delays and transportation too, which can
hamper the supply chain forcing companies to hold safety stock of raw material
inventories.
·
Long
Lead and High demand items need to be held in Inventory
Often raw material supplies from
vendors have long lead running into several months. Coupled with this if the
particular item is in high demand and short supply one can expect disruption of
supplies. In such cases it is safer to hold inventories and have control.
2.3 Inventory Costs
Inventory procurement, storage and management is associated
with huge costs associated with each these functions. Inventory costs are
basically categorized into three headings:
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost &
Cost of Replenishment
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