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Reasons for Holding Inventory - Inventory Management

   Posted On :  23.06.2018 05:25 am

Any firm would like to hold inventory at specific level to meet smooth, uninterrupted production schedule or to cater consumer demand in case of wholesalers or Retailers or to achieve the economies of scale from operations or protect the image from uncertainties or fluctuating demand as the case may be.

Reasons for Holding Inventory
 
 
Any firm would like to hold inventory at specific level to meet smooth, uninterrupted production schedule or to cater consumer demand in case of wholesalers or Retailers or to achieve the economies of scale from operations or protect the image from uncertainties or fluctuating demand as the case may be. A recent study on very popular 85 FMCG brands such as RIN, Nestle, Sunrise, Ariel, LUX, etc, which constitute roughly 20% sales of the FMCG potential (estimated annual sales Rs.40, 000 Crores), the stock outs occurs nearly 20% times 2. This study revealed that even though conducted at metros and especially super chain stores, lack efficiency of the channel members and the policy of the organizations to keep the lower inventory levels.
 

Avoiding Uncertainties

 
 
Raw Materials Inventory: Today managers are dealing with Multi product – Multi plant with a multiple sources/warehouses/countries. Fluctuation in price and demand seasonally of product nature forces the organization to hold inventory against these kinds of uncertainties.
 
WIP Inventory: Between the manufacturing operations, within the plant to avoid shutdown of main units, because of the critical part/ spare is out of stock or the line has broken down, normally certain amount of Work – in – Progress inventory is always maintained. In some cases, some of the spares/components may be produced in batches to achieve the efficiency or it can be produced with little effort and money. Thus the WIP Inventory is part and parcel of inventory management.
 
Finished Goods Inventory: In case of fast moving consumer goods, as the demand is fluctuating over time, it is always better to keep/hold finished goods to meet the demand against uncertainties. If the raw material is seasonal or the demand is seasonal it is necessary to keep finished goods inventory to meet the demand as in the cases like Sugarcane, Cement, Soft drinks etc.,

 

Achieving Economies of Scale

 
 
In case of transportation, it is obvious rather than transporting ‘Less than a Truckload’ or ‘Less than a Car load’ (LCL) of quantities, full load definitely reduces the transportation cost per unit per kilometer. This would applicable to both finished goods inventory as well as raw materials. In case of bulk purchases, the manufacturer/buyer firm definitely would try to explore the Quantity Purchase Schemes (QPS) associated with bulk purchases or price break options against various quantities.
 
Some of the firms produce large quantities at a time to avoid frequent changes in the production line. In such cases, not only we have to hold large quantity buy also must compare holding cost, cost of obsolescence, and cost of capital against the preparation cost of production. On the other hand, smaller batch size would reduce inventory holdings; capital locked in inventory but will result in frequent setting or high set up cost.
 

Meet the Buffer

 
 
In the distribution channel, or in a supply chain, the participants are scattered geographically. Sometimes, the time between placing the order and getting the stock (Replenishment time) may vary due to several reasons. It is a compulsion to hold inventory at various stages in order to meet the demand.
 

Balancing Seasonally in Demand and Supply

 
 
Sometimes there may be steep increase in demand. For example during the festival seasons, there is sharp rise in demand of clothes/suiting/ shirting/sugar/oil etc., It is very much required to hold higher inventory to meet/explore the opportunity.
 
Products such as cements, steel, building material normally the sales is sluggish during winter. Soft drinks are picking up the trend during summer. To meet these kind of seasonally in demand, again the firm is forced to keep higher level of inventories. 
Tags : Operations Management - Transportation / Assignment & Inventory Management
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