Explain how does cost sensitivity affects the decision making in relation to inventory management
Answers
Explanation:
Physical space may cap the amount of material held on-site. At a manufacturing site, space for raw materials must be adequate to supply production for a given period of time. Since square footage devoted to storage does not contribute directly to sales, most decisions attempt to reduce the amount of floor space used without jeopardizing supply for production. Smaller supply shipments more frequently may be one solution. Finished goods may also be shipped frequently or sent to off-site storage to maximize room for raw materials.
Cost
Several cost factors influence inventory management decisions. The value of raw materials represents stalled cash flow, assets that don't actively contribute to the bottom line. This feeds the theory of "just in time" delivery, where raw materials arrive as they are consumed, thus eliminating costs associated with warehouse space and unused inventory. Bulk purchasing is the flip side of the scenario. Suppliers may offer discounts on quantities of materials in excess of your immediate needs. This can improve profit margin on finished goods, but only if additional warehousing and finance charges are avoided.
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Answer:
In its most basic description, inventory management is control over the flow of units into and out of a stock of goods. Inventory management is critical in manufacturing environments, as an interruption of raw materials effectively halts production. Even in an office environment, where running out of copy paper may be an inconvenience rather than a crisis, decisions about inventory management affect conditions and budgets.
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