Inventory is very important to any organisation. Its main
function is to provide operations with enough supplies of materials that are enough
to cater for the demand. Hennet (2003) asserts that inventory is there to provide the business with exact the right
amount of resources: not so few that the business can run out of materials, and
not so many that they exceed more than they are used. To achieve this
function effectively, the business should aim to find the optimum state,
between too much and too little, without ever running out of stock. For example
the Grain Marketing Board has to make sure that they have enough grain for the
country. In some in instances where there is poor harvest in the country, the
grains are imported in order to maintain enough inventory. This successful
balance will improve cash flow and profitability, and keep the company running
smoothly.
The function of inventory is to having what is needed when it is
needed, without accumulating more than the company can use. The company has aim
to only keep on hand an amount that the business will turn over in a reasonable
time frame. There are industry averages for inventory turnover rates, and these
averages make useful guidelines and target amounts (Lambert, 1987). However, it
is paramount that the business maintain adequate supplies without generating
clutter. In the case of the Grain Marketing Board, grain lose its quality with
time hence it’s important to manage the inventory well and avoid overstocking
which may result in poor grain quality.
In case the company purchases and stores too much inventory, the
cash flow may suffer, because the cash
is tied up in items that are sitting on the shelves unused or unsold rather,
than being available for immediate needs such as rent and payroll (Lambert,
1987). Excessive inventory amounts can
also cost the company money in storage and handling, and occupy space that
could be better used for other purposes. I remember there was a time the Grain
Marketing Board had a lot of maize and some of it was stored at the Cold
Storage Company at a fee. In that period the Grain Marketing Board lost a lot
of money the storage fees.
If it happens that the company does not have enough inventory,
then the customers’ needs won’t be met and they could end up taking their
business elsewhere. This loss of business may not be just a matter of losing a
particular sale on a particular day, but also losing longer term business if
the customers come to believe that other alternatives are more dependable and
reliable. On the surface, it may seem that keeping lower inventory levels saves
the company money in purchasing expenses, but it will cost more in lost sales
but there won’t have enough product on hand to sell (Lambert, 1987).
Inventory levels will most effectively fulfill their purpose, if
you a successful systems for managing and replacing supply is developed. Then
Create metrics for optimal inventory levels, based on sales records over time.
Identify the critical points at which the organisation should reorder, and
introduce digital or paper systems for communicating to the purchasing
department when inventory levels drop below these points.
Building relationships with suppliers who can resupply the stock
quickly if you experience a sudden surge in demand is very critical. It’s worth
paying extra to restock the inventory quickly in an emergency, as long as less
expensive options are used as default.
Furthermore Camacho and Bordons (2002)
highlights the following functions of inventory:
1.
Inventories Serve as Cushions:
Against shocks due to demand/supply fluctuations, it
separates different manufacturing operations from one another and makes them
independent so that each operation can be performed economically. For example,
the Grain Marketing Board has to deal with several consumers and vendors and
due to their unpredictable behavior there are always fluctuations in demand or
supply of goods which disturbs the schedule of the enterprise.
Inventories absorb
these fluctuations and help in coming up with undisturbed production i.e., the
organisation decouples the manufacturing activities from the consumer and
vendor successfully by cushions of stocks. Furthermore purchasing/order of raw
material can be carried out independently of the finished products distribution
and both of these activities can be made low cost operations say by ordering
raw material and distributing products in one big lot than in small batches.
Thus it leads to better utilization men and machines besides economy (Lambert,
1987)
2.
Inventory, a Necessary Evil for
Any Enterprise:
Inventories require valuable space, capital and other
overheads for maintaining it. This is the backside of keeping inventory. As a
result the invested capital remains idle till the stocks are not consumed. On
the other hand, smooth working of the organization is not possible without
inventory so it is a necessity. Further it has been observed that costs of not
having inventory (stock out conditions) are usually greater than costs of
having them. Thus inventory is a necessary evil.
3.
Inventory Provides Production
Economies:
Purchase in desired quantities nullifies the effects of
change in prices or supply. Stocks bring economy so purchase of various inputs
due to discounts on bulk purchase. This comes as a very important advantage of
any business especially where the market has unstable prices like in Venezuela.
4.
Creation of Motivational Effect
in Decision Making:
Creates motivational effect in decision and policy making
e.g. a company coming in to but grain from Gmb finding out that they are stacks
and stacks of the product, they might be compelled to buy more of the product
that they initially wanted.
In addition
Koivisto et al (1991) complements the
findings of Camacho and Bordons (2002) and they reveal more functions of
inventory. Their findings are similar and in some instances they are an
expansion of what Camacho and Bordons (2002) alluded. The functions are as
follows:
1.
Financial Objectives:
The major financial objective of holding the inventory is
to keep the investment involved within the enterprise’s cash position so that
the working capital is not thrown seriously out of balance. In an unfortunate
instance an organisation might keep less inventory and spent its resources of
other business related issues and later to discover that they are less
resources available to buy the raw materials and products for the customers.
2.
To Create a Buffer Stock
Between the Input and Output:
So that, the outgoing flow of products is as little
dependent on the input material characteristics as possible. If this buffer
system is not maintained then the company might end up not being able to supply
its customers efficiently. On the other side if the company has more inventory
in relations to demand then the product might lie idle holding the cash that
could have been used in other activities of the business. Moreover keeping more
inventory may result in the product losing its quality.
3.
To Ensure Against Delay in
Deliveries:
The delay in delivery of finished product to the buyer is
avoided by holding inventory stock of finished goods. In day to day running of
a business, orders of products are unpredictable. As a result keeping inventory
counters such uncommon situations. In addition market requirements may disturb
the manufacturing programme of the enterprise. Depending upon the production
requirements stocks are to be maintained and supplied.
4.
To Ensure Against Scarcity of
Materials in the Market:
Sometimes input materials may become scarce and difficult
to get when there are large fluctuations in output and demand for them. A
reserve stock of raw materials is important. It ensures smooth manufacturing
operations.
5.
To Make Use of Quantity
Discounts:
Input materials and components/parts are usually cheaper
when purchased in bulk quantities owning to quantity discounts and lower
transportation costs/charges. Keeping inventory functions as a cost effective
strategy, essential for any business.
6.
To Utilize to Advantage Price Fluctuations:
Price fluctuation may have a marked effect on the
procurement policy of an enterprise or organization, if these fluctuations are
to be utilized to advantage of the unit, materials have to be purchased in
adequate quantities when prices are lowest.
All the above functions of inventory involve cost. The
inventory control is mainly concerned with making optimum decisions regarding
above variables which are subject to control. Inventory is an idle resource
which is usable to have value.
In a nut shell inventory is a very significant to any
organisation. Its functions which have been discussed above can be narrowed
down to reduction in costs and maintaining of product enough to cover the
demand. If inventory is not managed it may become a baggage to the company as
it may keep cash that would have been used in other operations. The cost of
having more inventory however is less than that of having less of the product
than the demand.
References
1.
Camacho,
E. F. and Bordons, C., 2002, Model Predictive Control. Springer-Verlag London
Limited
2.
Hennet,
J.-C., 2003. A bimodal scheme for multi-stage production and inventory control.
In Automatica, Vol 39, pp. 793–805.
3.
Koivisto,
H., Kimpimäki, P., Koivo, H., 1991. Neural predictive control - a case study.
In 1991 IEEE International Symposium on Intelligent Control.IEEE
Press.
4.
Lambert,
E. P., 1987. Process Control Applications of Long-Range Prediction.
PhD Thesis, University of Oxford. Trinity.
Comments
Post a Comment