Question

What factors would influence the inventory levels for a company? How would one determine the optimum level?

Answer 1

FACTORS INFLUENCING INVENTORY LEVEL:

Many factors influence inventory levels. The principal effects of these factors are reflected most strongly in the levels of inventory and the degree of control planned in the inventory control system.

• Type of Product:

If the materials used in the manufacture of the product have a high unit value when purchased, a much closer control is usually in order. Jewelers are much more careful with their stock of diamonds than they are with display cases full of low-priced costume jewelry. This same principle holds in manufacturing.

• Type of Manufacture:

The close relationship between the type of product and the type of manufacture makes an analysis of the effect on inventory controls somewhat repetitious. Continuous manufacture is common to the manufacture of standard products. However, some standard products are made in batches. Where continuous manufacture is employed, the rate of production is the key factor.Here, as a matter of fact inventory control is of major importance and in reality controls the production of the product.

• Volume:

The volume of product to be made, as represented by the rate of production, may have little effect on the complexity of the inventory problem. Literally millions of brass bases for light bulbs are manufactured each month involving the control of only two principal items of raw inventory.

• INVENTORY MANAGEMENT:

The planning of the control of inventory can be divided into two phases, inventory management and inventory control. Inventory management accomplishes the first phase.

Optimum Inventory Level:

Earlier, we discussed how inventory management is responsible for determining the inventory level that will result in the best profit. We have already pointed out that the trend of sales must be watched closely and inventories adjusted in advance of the change in rate of production as determined by actual sales. But this is not the only factor that must be considered by inventory management when determining inventory levels.The planning for the actual production of the product may involve problems of leveling production, that is producing at a constant rate even though sales may fluctuate. In slack times products are built to stock; the finished goods inventory is increased to offset the demand anticipated when future sales surpass the production rate of the plant. The proper evaluation of this factor requires close cooperation with the manufacturing function.