NVENTORY MANAGEMEN 924.1 Concept of Inventory penefits and Costs of Hola = 24.2 Need or Motives for Holding Inventory ¢ 243 peas Models of Lees Inventories #244 Objectives of Inventory Management Questions nagement @ 24.6 Let us Sum Up @ Assessment EARNING OBJECTIVES AN completion of this chapter, you should be able eee should be able to List out the need or motives for holding inventories. Enumerate the benefits of holding inventories = Fin point costs involved in holding inventories Sate the objective of inventory management Explain the chief models of inventory mangement eeeees In the previous chapter 23, you have read that, according to net concept of working, capital, the difference between current assets and current liabilities is called working capital. You also know that current assets refer to those assets that are likely to be jenverted into cash or liquidity within a year’s period. These include items like bank balance and cash inventories, debtors or accounts receivables, bills recievables, balance. On the other hand, current liabilities refer to those liabilities that are to be paid within a period of one year. These include creditors or accounts payables, bills payable, bank overdraft, outstanding expenses etc. Usually, inventories constitute a major portion, about 60 per cent of total current assets.! Hence, management of inventories becomes crucial to the successful management of Sverall working capital of a business enterprise. This chapter will discuss the key variables involved in managing inventories effectively. Let us begin with the ‘concept of inventory.” 24.1 CONCEPT OF INVENTORY What is inventory? Inventory refers to those goods which are held for eventual sale by u e stocks of the product a firm is the business enterprise. In other words, inventories ar manufactaring for sale and components that make up the product. Thus, inventories form. alink between the production and sale of the product. The forms of inventories existing : ified i tegories: ma m i ise can be classified into three cal “ paula Re rae are t ds which have been purchased and stored for hose goo f been committed to production future productions. These are the g00! P ds which have not yet “B h bi ‘itted t ducti Y ed to production 1) Work-in-! is e are the goods which nave been comm I Sut the fae pedal re on yet been produced In other words, work-in-progress 'sventories refer to veemi-manufactured products. —eeeeanen 1M Pandey: F 1 Mangement, (Sixth Revised Edition), Vikas Publishing House Pvt. Ltd., New vy: Financial Mange’ [ Pathi, 1994, p. 755 P 227Finii Is after production process (rid) Finished Goods— These are the good: 2 ce ie ee . is Compa. these are final products of the production proces: : han fo a: Se of . Meg | or retailer, Inventories are generally referred to as ‘merc! ntory i, } S| Some firms also maintain a fourth kind of inventory, namely, supplies Bran, | Supplies are office and plant cleaning materials, oil, eet lent bs and the like ne items are necessary for production process. In paractice, these SUPE Hes form a Smal Of total inventory involving small investment. Therefore, a highly sophisticateg techni of inventory management is not needed for these. The size of above mentioned three types of inventories to be maintained will Vaty ir one business firm to another depending upon the varying nature of their business he example, while a manufacturing firm will have all three types of inventories, are Tet or a wholesaler business, due to its distinct nature of business, will hav I re only fishy goods as its inventories, In case of them, there will be no inventories of Taw Materials well as work-in-progress 24.2 MOTIVES FOR HOLDING INVENTORIES A simple but meaningful question arise &xpensive to hold inventories? In reply, inventories in an enterprise: 1. Transaction Motive— According to this motive, an enterprise maintains inventories to avoid bottlenecks in its PI roduction and sales, By maintaining inventories, the business ensures that production is not interrupted for want of raw material, on the one hand, and sales also is not affected on account of non-availability of finished goods, on the s: Why do firms hold inventories while its there are three major motives? for holding other, 2. Precautionary Motive— Inventories are also h against unpredicted business, There for finished goods at times. Similarly, materials at a time. In both the cases, cushion to guard against the risk of eld with a motive to have a cushion may be a sudden and unexpected spurt in demand there may be unforeseen slump in the supply of raw @ prudent business would Surely like to have some Such unpredictable changes, ‘erprise may also hold inventories to take the advantages of price fluctuations, Suppose, if the Prices of raw materials are to increase rather steepy, the enterprise would like to hold more inventories than Tequired at lower prices. 24.3 BENEFITS OF HOLDING INVENTORIES Holding inventories bears certain advantages. The “portant advantages are extolled as follows: y 1 Avoiding Losses of Sales— By holding inventories, a firm can avoid sales losses on account of non-supply of goods at times demanded by its customers, 2. Reducing Ordering Costs— Ordering costs, ie., the orders such as typing, approving, mailing, etc. can be red places large orders rather than several small orders, 3. Achieving Efficient Production Run— icier efficient production run. In other words, supply of sufficient i shortage of raw materials that may interrupt production ope! ‘nt inventories als ensures nventories protects against ration