"The management of inventory must meet two opposite needs". What are these? How is a balance brought in these opposite needs?
Answers
Answer:
Liquidity and working capital....
Answer:
Explanation:
"The management of inventory must meet two - opposing needs." Enumerate.
Reasons to Hold Inventory
Most businesses hold inventory for many reasons. Among them are:
i) Meeting unexpected demands: The chain of supply and demand really comes into consideration here. Business people know that consumers expect goods and services when they need them. Thus, businesses usually stock up their inventories to meet these unexpected demands. These demands may result in overcrowding of inventories because we never know when the storm strikes and consumers would flock to buy the items.
ii) Smoothing seasonal demands: For major events and the changing seasons, most businesses have inventories at hand to smoothen the seasonal demands. For example, with the coming season businesses are busy meeting and stabilizing the upcoming Christmas demands of consumers. If they do not have any inventory, how can they meet these demands
iii). Taking advantage of price discounts: When a firm purchases goods from the manufacturers and suppliers, they usually get price discounts to attract and maintain regular buyers. Taking advantage of price discounts is helpful at times but one must always remember not to overstock the inventory because inefficient buying may cause failure of the business.
iv). Hedging against price increase: A Company usually holds inventory to avoid the fluctuating market prices. Thus, by having efficient and good inventory system, businesses can control their inventory cost.
v) Getting quality discounts: When businesses have inventory in store, they can get quality discounts because they know which goods and services to buy from the suppliers and manufacturers. It helps to learn where to get better deals than no deal at all.
Reasons why not to hold refer to Inventory Ordering:
Holding, and Shortage Costs, even so inventory decisions involve a delicate balance between three classes of cost. These costs are:
a) Ordering Cost- Cost of replenishing Inventory
b) Carrying Cost- Cost of holding an item in inventory
c) Shortage Cost- Temporary or permanent loss of sales when demand cannot be met
Having inventory constantly at hand is good but sometimes there are hidden costs that would prove to be a menace for businesses. These costs include could cause:
Longer lead times
Reduce responsiveness
Underlying problems are hidden rather than being exposed and solved
Quality problems are not identified immediately
No incentive for improvement of the process