Inventory Management

Functions of Inventory

1. To meet anticipated customer demand – The inventories are kept to satisfy expected demand of the customer like a stereo, tooth-brush, soap etc

2. To smooth production requirements – To meet high requirements during seasonal period (like umbrella)

3. To decouple operations – The buffers permit other operations to continue temporarily while the problem in the line is resolved. Similarly, firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers

4. To protect against stock-outs – Delayed deliveries and unexpected increases in demand increase the risk of shortages. Delays can occur because of weather conditions, supplier stock-outs, deliveries of wrong materials, quality problems etc. Risk of shortages can be reduced by holding safety stocks, which are stocks in excess of average demand to compensate for variabilities in demand and lead time.

5. To take advantage of order cycles – Inventory storage enables a firm to buy and produce in economic lot sizes (minimum cost) without having to try to match purchases or production with demand requirements in the short run

6. To hedge against price increase – Firm will suspect that a substantial price increase is about to occur and purchase larger-than-normal amounts to beat the increase. The ability to store extra goods also allows a firm to take advantage of price discounts for larger orders

7. To take advantage of quantity discounts