Inventory

The term inventory refers to the stockpile of

the products a firm is offering for sale in
future in the normal course of business
operations. The assets which firm store as
inventory in anticipation of need are:
• Raw materials
• Work in progress
• Finished goods.
 Cost of Holding Inventory
1. Ordering Cost: This is associated with the
acquisition and ordering of inventory. Ordering
cost also includes cost associated with
acquisition of materials from stores by different
production units/ departments internally.
• Preparing a purchase order or requisition form
• Receiving, inspecting and recording the goods
received to insure both quality and quantity.
Cost of Holding Inventory Cont..
Ordering Cost Cont…
• The cost of acquiring material consist of
clerical cost and cost of stationery.
• They are generally fixed per order placed
irrespective of the amount of order.
• The more frequent the acquisition of
inventory made, the higher are such cost.
• The larger the inventory the fewer are the
acquisitions and the lower are the order
cost.
Cost of Holding Inventory Cont..
2. Carrying Cost: This cost is involved in
maintaining and carrying inventory and includes:
• Those that arise due to the storing of Inventory:
Tax, depreciation, insurance, maintenance of
building/ utilities, janitorial services. Insurance of
building against fire and theft. Depreciation in
because of pilferage, fire, technical
obsolescence, price decline. Serving cost
includes labor for handling inventory, clerical and
accounting cost.
•
Cost of Holding Inventory Cont..
2. Carrying Cost Cont…
• The opportunity cost of Funds: This
consist of funds (interest on capital) to
finance the acquisition of inventory.
Benefits of Keeping High Inventory
• To economize the buying/manufacturing
costs: a certain amount of fixed cost-
ordering cost or set up cost is incurred
whether an item is purchased from outside
suppliers or manufactured at company’s
own plant. Hence company tend to order
or manufacture beyond immediate needs
to distribute fixed cost over a large no. of
units.
Benefits of Keeping High Inventory
Cont…
• To keep pace with changing market
conditions: By reading the trend of the
market the company can speculate the
future inventory requirement. It takes care
of problems which may arise due to non
availability or spurt in the prices in future.
Benefits of Keeping High Inventory
Cont…
• To satisfy demand during period of
replenishment: No company can obtain
the items that it require, whether
purchased or manufactured, within zero
time lag. It generally takes few days or
weeks to push through each work order
and make the items available for the
assembly. Similarly vendor may quote a
delivery period of few days, weeks or
months.
Benefits of Keeping High Inventory
Cont…
• To Take care of Contingencies (To prevent
stock outs): A company may suffer a
substantial loss on account of item being out of
stock. The stock out of item may result in
1. To do certain operation second time
2. To rob parts from one assembly to finish
another assembly
3. H shut down the complete operation
The stock out result the rate of consumption is
more than the estimated usage rate or when
there is delay in delivery.
Benefits of Keeping High Inventory
Cont…
• To prevent loss of sales: Finished goods
inventory is maintained to match
requirements of the customers for prompt
execution of their orders. When products
are competitive it matters the most. Low
inventory in such cases may not only
result in loss of sales but also loss of
customer.
Benefits of Keeping Low Inventory
• Minimizing Inventory investment: Inventory
tie up cash that the company could use
elsewhere in the business. Excess
inventory can create a negative cash flow,
something that must be avoided.
• Maximizing Profit: Profits van be
maximized by increasing revenues or
decreasing cost.