The term “Inventory” is originated from the French word “Inventaire” and the Latin “Inventariom”, which implies a list of things found. The term inventory has been defined by the American Institute of Accountants as the aggregate of those items of tangible personal property which (a) are held for sale in the ordinary course of business, (b) are in the process of production for such sales, or (c) are to be currently consumed in the production of goods or services to be available for sale. The term inventory refers to the stockpile of the products a firm is offering for sales and the components that make up the product. Inventories are the stocks of the product of a company, manufacturing for sale and the components that make up the product. The various forms in which inventories exist in a manufacturing company are (i) raw materials, (ii) work-in-process, (iii) finished goods, and (iv) stores & spares. However, in commercial parlance, invantory usually includes stores, raw materials, work-in-process and finished goods. The term invantory includes materials – raw materials in process, finished packaging, spares and others stocked in order to meet an unexpected demand or distribution in the future.
Inventory management occupies the most significant position in the structure of working capital. Management of inventory may be defined as the sum of the total of those activities necessary for the acquisition, storage, disposal or use of materials. It is one of the important components of current assets. Inventory management is an important area of working capital management, which plays a crucial role in the economic operation of the firm. Maintenance of large size of inventories by a firm required a considerable amount of funds to be invested in them. Efficient and effective inventory management is necessary in order to avoid unnecessary investment and inadequate investment.
A considerable amount of funds is required to be committed in inventories. It is absolutely imperative to manage inventories efficiently and effectively in order to optimise investment in them. Prudent inventory management is one of the challenging tasks of the financial manager. Efficient management of inventory reduces the cost of production and consequently increases the profitability of the enterprise by minimising the different types of costs associated with holding inventory. An undertaking, neglecting the management of inventories, will be jeopardising its long-term profitability and may fail ultimately. It is possible for a firm to reduce its level of inventories to a considerable degree, i.e., 10 to 20 percent of current assets without adverse effects on production and sales by using simple inventory planning and control techniques. If business planning can be perfect, a firm may succeed even in attaining the “Zero inventory” norm which as the Japanese management seems to suggest, is not too unrealistic a goal. The reduction in inventories carries a favourable impact on the company’s profitability. The efficiency of inventory management in any firm depends on the inventory management practices adopted by it.