Introduction:
Inventory plays a significant role for any organization operating with “Product” as their main source of offerings.
Inventory refers to the stock an organization accumulates for the Future, like using it as raw material for meeting future demands.
Kowing the purpose of the inventory helps the organization to analyze and meet the inventory cost and requirements.
That purpose provides a clear idea of how much stock is needed in the business currently and how much should be the turnover period.
Inventory control could be different for different departments of an organization.
In the same organization, factories need to maintain the stocks of raw materials while the showroom needs to keep the inventory of finished goods produced by the factory.
Purpose:
Consistency in the production:
Production of the goods is a significant aspect of inventory management. Production starts with raw material and ends with the end product. Inventory is of all the elements in the process, whether it be raw material or final product.
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.
For Example, The Demand for blankets will only be high in the winter. The organization should produce blankets throughout the year and keep them in stocks to reduce the burden.
Customer Satisfaction:
Customer satisfaction is one of the primary goals of an organization.
Organizations hold inventory to fulfill the need of the customer.
Even if the product gets to hold for a shorter period, companies can satisfy the customer’s needs.
After Sales Services From the organization attracts the customers’ attention as the customer is thinking for the long-term use.
Organizations Also take care of the product if maintenance is needed to help the customer.
Risks Involved:
The business operates in an insecure environment.
Organizations maintain adequate amounts of inventory to battle this problem.
It helps the firm to utilize favorable conditions and to get prepared for adverse situations.
For instance, the stock of raw materials is crucial for the sudden rise in the price of raw materials. 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.
Inventory cost:
Inventory comes with an added cost to the organization. The cost is not only the purchase of stock and includes the maintenance cost. Inventory costs are the cost 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.
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.
