REASONS FOR HOLDING INVENTORIES

REASONS FOR HOLDING INVENTORIES

Whether a business is in retailing or manufacturing, there are several cogent reasons for holding inventory. Businesses may hold stocks of raw materials spare parts for machinery, work in progress or furnished goods. Given the there are costs involved with purchases, orders and carriage inwards, a firm might want to minimize its order costs and utilize storage inventory, these costs can be offset if there are good business reasons for so doing:

1. To meet the demand: A business must ensure that it has adequate supplies to meet expected demand for its goods, regardless of whether it is a retailing or production environment.

Particularly where a business has a high demand and rapid turnover, having stock in storage ensures that the firm can comfortably meet anticipated demand.

2. To guard against shortages: holding inventory can act as insurance against future shortages. Unexpected shortages in the supply of raw materials or finished goods can affect the production run of a business or its ability to meet demand. Holding inventories allows a degree of continuity for the activities of an enterprise.

3. To benefit from discounts: Suppliers often offer trade discount for bulk purchases, once those purchases are above a certain amount. A business can reduce the unit cost of raw materials and its ordering cost (delivery, import duties) by purchasing a large amount of goods/raw material to hold in stock.

4. To deal with variations in usage or demand: “Usage” refers to production consumption in a manufacturing process. Increased usage can increase the demand for materials. This is the result of either increased inefficiency or increased production levels. Sometimes a business might cater for special orders or have high seasonal demand that it must address, requiring additional stock to facilitate such occurrences.

5. To facilitate the production process: stock can allow the manufacturing process to flow smoothly and help the business to respond quickly and effectively to contingencies.

6. In times of high inflation/supply shortages: holding vast supplies of inventories can be a deliberate strategy in respond to unusual or difficult economies circumstances. In times of high inflation, a business might not wish to purchase stock at increasingly higher prices. Once the business determines that it is feasible to hold additional inventory beyond the usual levels, this is a very sensible strategy.

7. Some processes require holding work in progress: Inventory can also include work in progress. Some products might have longer production cycles than other. (Like wine and cheese for instance). It is necessary to hold a high volume of inventory to cater for the inherent nature of production in some business contexts.

Naturally, there are restrictions on how many inventory a business could or should hold. The nature of a product, regulations and maximum storage capacity are some elements that limit or determines a business from holding too much inventory. Once a business decides to hold inventory, then a proper inventory management and control is necessary to optimize both the stock levels and inventory cost.