Explain the advantages and Disadvantages of holding inventories? Discuss.
Answers
Inventory management impacts your ability to operate a low-cost, high profit margin business. Typically, a product reseller wants to hold just enough inventory to meet near-term customer demand. Excess inventory is costly to hold and manage in most cases.
Advantages:
Each material can be procured in the most economical quantity.
Purchasing and inventory control people automatically gives their attention to those items which are required only when are needed.
Positive control can easily be handled to maintain the inventory investment at the desired level only by calculating the predetermined maximum and minimum values.
Disadvantages:
Sometimes, the orders are placed at the irregular time periods which may not be convenient to the producers or the suppliers of the materials.
The items cannot be grouped and ordered at a time since the reorder points occur irregularly.
If there is a case when the order placement time is very high, there would be two to three orders pending with the supplier each time and there is likelihood that he may supply all orders at a time.
EOQ may give an order quantity which is much lower than the supplier minimum and there is always a probability that the order placement level for a material has been reached but not noticed in which case a stock out may occur.