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Fluctuation in Demand: As demand levels are never an absolute certainty, holding extra inventory, enables organizations to meet unexpected surges in demand.
Unreliability of Supply: Inventory protects you from unreliable suppliers, or when an item is scarce and a steady supply of stock is difficult to ensure.
Quantity Discounts: Many suppliers offer discounts based on certain quantity breaks, because large orders tend to reduce total processing and shipping costs. This also allows suppliers to take advantage of the economies of scale in their own production processes.
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To have a correct account of the goods in stock ... therefore the ability to ship and keep up with the demand to ship in time to the customer
Meeting production and sales needs
The Transaction Motive which facilitates continuous production and timely execution of sales orders.
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.
Smoothing seasonal demands
With the comings and goings of major events and the changing seasons, most businesses have inventories at hand to smoothen the seasonal demands. For example, Christmas is just round the corner. With the coming season, retail outlets as well as other 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
Taking advantage of price discounts
When a business purchase goods from the manufacturers and suppliers, they usually get price discounts if they buy in bigger bulks. Manufacturers and suppliers give these 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.
Hedging against price increase
Businesses usually hold inventory to avoid from the ever fluctuating market price of inventories. Thus, by having efficient and good inventory system, businesses can control their inventory cost.
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.
MEET DEMAND:- In order for a retailer to stay in business, it must have the products that the customer wants on hand when the customer wants them. If not, the retailer will have to backorder the product. If the customer can get the good from some other source, he or she may choose to do so rather than electing to allow the original retailer to meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost forever.
KEEP OPERATIONS RUNNING:- A manufacturer must have certain purchased items (raw materials,- components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods.
Inventory between successive dependent operations also serves to decouple the dependency the operations. A machine or work centre is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a workcenter, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each workcenter, then each. Machine can maintain its operations for a limited time, hopefully until operations resume at the original centre.
LEAD TIME:- Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered.
If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory.
A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, on-hand inventory of three months’ steel requirements would be necessary.
HEDGE:- Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
QUANTITY DISCOUNT:- Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.
