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.