Purpose Of Maintaining Inventory

Introduction:

 In the process of management the yield of the firm can be increased by some methods like, By maximizing the margin of profit; or By maximizing the production with a given amount of capital, i.e. to increase the productivity of capital.  Among this Materials Management has become one of the most effective. In Materials Management, Inventory Control play vital role in increasing the productivity of capital.

Purpose of maintaining inventory or objectives of inventory cost control:

a)      The purpose of maintaining the inventory or controlling the cost of inventory is to use the available capital optimally (efficiently) so that inventory cost per item of material will be as minimum as possible .

b)      For this the materials manager has to strike a balance between the interrelated inventory costs.

c)       In the process of balancing the interrelated costs i.e. Inventory carrying cost, ordering cost or set up cost, stock out cost and the actual material cost.

Objectives:              

 “The objective of controlling the inventories is to enable the materials manager to place and order at right time with the right source at right price to purchase right quantity”.

Benefit of inventory:

The benefits derived from efficient inventory control are:

a)      It ensures adequate supply of goods to the customer or adequate of quantity of raw materials to the manufacturing department so that the situation of stock out may be reduced or avoided.

b)      By proper inventory cost control, the available capital may be used efficiently or optimally, by avoiding the unnecessary expenditure on inventory.

c)       In production models, while estimating the cost of the product the material cost is to be Added. The manager has to decide whether he has to take the actual purchase price of the material or the current market price of the material. The current market price may be less than or greater than the purchase price of the material which has been purchased some period back. Proper inventory control reduces such risks.

d)      It ensures smooth and efficient running of an organization and provides safety against late delivery times to the customer due to uncontrollable factors.

e)      A careful materials manager may take advantage of price discounts and make bulk purchase at the same time he can keep the inventory cost at minimum.

f)       It enables a manager to select a proper transportation mode to reduce the cost of transportation.

g)      Avoids the chances of duplicate ordering.

h)      It avoids losses due to deterioration and obsolescence etc.

i)        Causes of surplus stock may be controlled or totally avoided.

j)        Proper inventory control will ensure the availability of the required material in required quantity at required time with the minimum inventory cost.

Though many managers consider inventory as an enemy as it locks up the available capital, but by proper inventory control they can enjoy the benefits of inventory control and then they can realize that the inventory is a real friend of a manager in utilizing the available capital efficiently.