Inventory Management – Objectives

Principle & Practice of Management

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Inventory Management – Objectives

Inventory Management Objectives

The inventory management objectives may be viewed in two ways and they are operational and financial. The operational Inventory Management Objectives is to maintain sufficient inventory, to meet the demand for the product by efficiently organising the firm’s production and sales operations, and the financial Inventory Management Objectives view is to minimise inefficient inventory and reduce inventory-carrying costs.
These two conflicting Inventory Management Objectives can also be expressed in terms of costs and benefits associated with inventory. The firm should maintain investments in inventory which implies that maintaining an inventory involves cost, such that smaller the inventory the lower the carrying cost and vice versa. But inventory facilitates (benefits) the smooth functioning of the production. An effective inventory management should:
1. Ensure a continuous supply of raw materials and supplies to facilitate uninterrupted production.
2. Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes.
3. Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service.
4. Minimise the carrying costs and time.
5. Control investment in inventories and keep it at an optimum level.
Others: Apart from the above, the following are also objects of inventory management. Control of materials costs, elimination of duplication in ordering by centralization of purchasers, the supply of right quality of goods of reasonable prices, provide data for short-term and long-term for planning and control of inventories.
Therefore, management of inventory needs careful and accurate planning so as to avoid both excess and inadequate inventory in relation to the operational requirement of a firm. To achieve higher operational efficiency and profitability of a firm, it is very essential to reduce the amount of capital locked up in inventories. This will not only help in achieving a higher return on investment by minimising tied-up working capital but will also improve the liquidity position of the enterprise.

Inventory Management Objectives

Risks of Holding Inventory

The holding of inventories involves above-said cost, they also expose the firm to take some risks. The risk in inventory management refers to the chance that inventories cannot be turned over into cash through normal sales without loss. Risks associated with inventory management are as follows:
1. Price Decline: Price decline is the result of more supply and less demand. In other words, it may be the result due to the introduction of the competitive product. Generally, prices are not controllable in the short-run by the individual firm. Controlling inventory is the only way that a firm can counteract with these risks. On the demand side, a decrease in the
general market demand when supply remains the same way also cause prices to decrease. This is also a long run management problem, because, a decrease in demand may be due to change in consumer buying habits, tastes and incomes.
2. Product Deterioration: Holding of finished goods for a long period or storage under improper conditions of light, heat, humidity and pressure lead to product deterioration. For example Cadbury’s chocolate. Recently, there were some live worms in the chocolate, it was due to improper storage. Deterioration usually prevents selling the product through
normal channels.
3. Product Obsolescence: Product may become obsolete due to improved products, changes in customer tastes, particularly in high style merchandise, changes in requirements etc. This risk may prove very costly for the firms whose resources are limited and tied up in slow moving inventories. Obsolescence cost risk is least controllable except by reduction in
inventory investment.
Thus, inventories are risk assets to manage in an effective way by minimising risks.