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
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.
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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