Torres, Louella Marie V.

BSBA OM 2-1

One of the most important parts of a company is its inventory. Without inventory, the need to
fulfil the immediate demand of the company’s customers cannot be satisfied. Inventory is a liquid asset
for the company wherein it gives the company a competitive edge as regards to its finances. As such,
most organizations that profit off of sales carry inventory and practice lean systems. There are many
reasons as to why they carry inventory around with them, but some of them are as follows.

The organization’s inventory cannot be delivered upon immediate request that’s why there’s a
grave need of protection against stockouts in case the organization runs out of stock. There should be an
allotted time for the delivery of the goods to be produced. During that gap in time, the organization has
to check whether or not they have enough inventory in stock to cover the demand of the public. The
lead time of the inventory’s delivery can also vary depending on the shipping time, production, supplier
site, lost orders, defective materials, and other problems. Supply outlets are never at the same place as
production, so you cannot always find a processing plant where there is demand.As a result, inventory
must be transported from one location to another, and sometimes held in a distribution center to be
distributed at the different locationn when necessary resulting to the need to carry inventory in order
to protect against potential stockout.

Maintain operational independence — The product is moved through many different operations
which have different processing rates during the production process as well as the supply chain. The
objective is to balance various processing capabilities, which is not always possible. So you need a
cushion between operations, and the inventory serves this purpose at various points in the system. A
strategically placed extra inventory evens out differences in processing capabilities. To offer it
consistency, extra product stores may be located at various locations of the supply chain network, or at
job centers inside a plant.

Consider also the strong interdependence of production line workstations. Usually, inventory is
put between workstations to reduce their interdependence. Otherwise, work stoppage can disrupt or
shut down the entire production line at one point. Remember also that ascribed to randomness, there is
a normal variance in the running cycles between similar procedures. The creation of a cushion of
inventory’s occurrence at a constant rate becomes desirable as a result.
 Balancing supply and demand is a must. Balancing the side of supply in the law of supply and
demand mitigates the great fluctuation of demand. However, demand can never be accurately
determined that’s why organizations have to have extra inventory to meet unexpected surges in
demand.

Seasonal demand patterns play a part to high and low demand periods such as summer ice
cream sales, or winter snow shovel sales. Production of products in tune with the seasonality of demand
would be expensive for production facilities. The same could cause the shutdown of facilities.

Protection from Uncertainty — There is often unforeseen incidents that affect both supply and
demand. This is attributed to randomness which may be anything from getting a shipment of faulty
products, or an unforeseen weather failure, to a strike at a supplier's plant. Companies carry extra
inventory in stock to protect themselves against such uncertainties, or buffer them.

Economic purchase orders — You've heard about keeping inventories low but you can buy
inventory in large quantities in this scenario. There are several reasons why this could be advantageous.
Suppliers, for example, occasionally offer price discounts to encourage customers to buy larger
quantities at one time. Similarly, buying large quantities could lead to savings linked to having the same
associated with larger quantities for transportation at the same time.