Inventory refers to the stock an organization accumulates for the future, like using it as raw material to prepare the finished goods.
Inventory control helps the organization analyze and meet the inventory cost and requirements.
It provides a clear idea of how much stock is needed in the business currently and how much should be the turnover period.
In some organizations, factories need to maintain the stocks of raw materials while the showroom needs to keep the inventory of finished goods produced by the factory.
It is expansive as it caters to the holistic technique.
An organization must understand the provision of the stock in various settings.
The stock could be functional for a longer period. It is required to hold the stock appropriately to have that perishability.
Goals
- It bargains at the least likely prices.
- It contributes to the optimum utilization of the organization’s capital.
- It addresses the need for stock in the organization.
- It contributes to having a good standing among the sellers.
Consistent production irrespective of demand:
Production of goods is a significant aspect of an organization.
Consistent production is the requirement of the organization.
Hence it is advisable to have a regular production cycle and store the words for the appropriate time.
Inventory cost:
Inventory costs are associated with the order the manager makes for the number of goods.
It is one of the first costs in the level of production.
The manager has to decide the order quantity as per the requirement of the production of goods.
The decision of order quantity depends on the analysis of four different costs associated with it.
The Four costs are:
Purchase Cost
Carrying Cost
Ordering Cost
Stock-out Cost
Purchase cost:
The Purchase cost is the amount a manager is willing to spend on the unit of goods known as purchase cost.
Purchase cost comprises two elements, one being the cost and the other being the number of quantities they want to purchase.
Purchase costs also help to determine the discount the organization can get.
A large amount of orders attracts bigger discounts.
Carrying Cost:
Carrying cost refers to the cost incurred while the stock is being stored.
These costs can also be called storage costs.
There could be two types of carrying costs:
1. The cost incurred to store the Gods like rent, lighting, staff salary, maintenance costs, insurance cost, taxes, etc.
2. The cost is the opportunity cost, the organization is leaving to get profits from the stock
For Example, interest in investments and Profits from other productive activities.
Ordering Costs:
Ordering costs all the costs incurred while purchasing the inventory.
These are the costs accompanied by the preparation of the purchase and other miscellaneous expenses like transportation, phone calls, etc.
Setup costs all the cost which occurs when the production of goods occurs within the organization.
Accounting costs are also part of the ordering costs.
Mostly, ordering costs are fixed costs and may not change with the change in order quantity.
Stock-out Costs:
These costs are also known as penalty costs, as they are associated with the delay in the delivery of the firm’s ability to deliver the product.
Organizations try to avoid stock-out costs. As this can not only hurt their revenue but can also create a Dent in their goodwill.
Risks associated:
The business operates in an uncertain environment.
Organizations maintain adequate amounts of inventory to battle this problem.
It helps the firm use favorable conditions and get prepared for adverse situations.
For instance, the stock of raw materials is crucial for the sudden rise in the price of the raw material inventory of finished goods is necessary to fulfill the sudden outbreak in demand for the product.
Inventory planning helps the organization to have a plan for the future.
