Need for Inventory Management - Why do Companies hold Inventories ?

Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventory or under inventory both cause financial impact and health of the business as well as effect business opportunities.

Inventory holding is resorted to by organizations as hedge against various external and internal factors, as precaution, as opportunity, as a need and for speculative purposes.

Reasons why organizations maintain Raw Material Inventory

Most of the organizations have raw material inventory warehouses attached to the production facilities where raw materials, consumables and packing materials are stored and issue for production on JIT basis. The reasons for holding inventories can vary from case to case basis.

  1. Meet variation in Production Demand

    Production plan changes in response to the sales, estimates, orders and stocking patterns. Accordingly the demand for raw material supply for production varies with the product plan in terms of specific SKU as well as batch quantities.

    Holding inventories at a nearby warehouse helps issue the required quantity and item to production just in time.

  2. Cater to Cyclical and Seasonal Demand

    Market demand and supplies are seasonal depending upon various factors like seasons; festivals etc and past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly they stock up raw materials and hold inventories to be able to increase production and rush supplies to the market to meet the increased demand.

  3. Economies of Scale in Procurement

    Buying raw materials in larger lot and holding inventory is found to be cheaper for the company than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse.

  4. Take advantage of Price Increase and Quantity Discounts

    If there is a price increase expected few months down the line due to changes in demand and supply in the national or international market, impact of taxes and budgets etc, the company’s tend to buy raw materials in advance and hold stocks as a hedge against increased costs.

    Companies resort to buying in bulk and holding raw material inventories to take advantage of the quantity discounts offered by the supplier. In such cases the savings on account of the discount enjoyed would be substantially higher that of inventory carrying cost.

  5. Reduce Transit Cost and Transit Times

    In case of raw materials being imported from a foreign country or from a far away vendor within the country, one can save a lot in terms of transportation cost buy buying in bulk and transporting as a container load or a full truck load. Part shipments can be costlier.

    In terms of transit time too, transit time for full container shipment or a full truck load is direct and faster unlike part shipment load where the freight forwarder waits for other loads to fill the container which can take several weeks.

    There could be a lot of factors resulting in shipping delays and transportation too, which can hamper the supply chain forcing companies to hold safety stock of raw material inventories.

  6. Long Lead and High demand items need to be held in Inventory

    Often raw material supplies from vendors have long lead running into several months. Coupled with this if the particular item is in high demand and short supply one can expect disruption of supplies. In such cases it is safer to hold inventories and have control.

Holding inventories help the companies remain independent and free from vendor dependencies.

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