Question

WHAT ARE THE PRIMARY REASONS FOR HOLDING INVENTORY? WHAT ARE THE REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT? DESCRIBE EACH OF THE COSTS ASSOCIATED WITH INVENTORY?

Answer 1

Primary reason for holding inventory is to generate revenue through sales by meeting customer demand. Holding inventory helps in meeting the uncertainty of customer demand and avoiding stock out situations. This also helps in leveraging cost discounts from suppliers and hedge against the price increase . This also avoids or minimize risk in delay of inbound goods and ensuring smooth Seasonal or cyclical demand.

The basic requirements of effective inventory management are

• Proper analysis of customer order pattern or market demand of each products
• Supplier efficiency analysis in ensurng the goods at the right time
• Ordering cost of goods and identification of opportunities in bulk inventor purchase and hedge against the price changes
• Seasonality or other trend of inventories
• Proper inventory management system for tracking the movement and storage of inventory.
• Different cost analysis of inventory associated cost and optimize the reorder level based on cycle or lead time of inventory to refill.

The major cost associated with inventory are

• Ordering cost :- it is basically cost per order and cost per inventory or parts
• Holding cost /carrying cost :- Inventory has obsolescence nature . thus carrying inventory results in depreciation of value
• Storage cost:- inventory needs space inside warehouse or distribution centre and that involves cost in storage space as well as other stocking or caring part of inventory such as refrigeration .
• Shortage or stock out cost .This is an opportunity cost where it results in loss of sales or customers trust