Comment on two opposing views: 1. Why we want to hold the inventories? & 2. Why we do not want to hold the inventories?

First: Reasons to Hold Inventory

Most businesses hold inventory for many reasons. Among them are:

• 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. 

Methods to Supervise Inventory 

    The success of a business depends on how well the owner(s)’s ability to maintain adequate quantities of items sold. Records provided by an inventory control system should call attention to the need  for reorder when necessary or eliminate “dead wood” inventory when called for. Inventories are controlled and supervised by three (3) methods:

(a) Perpetual Inventory Control- The perpetual method is the most frequently used method. It is more costly than the other two but it is an efficient way of keeping count. In this system, complete data records are kept on each item of merchandise and additions or subtractions are made with each transaction. There is an inventory balance plus a receipt of sale, minus the actual sale to reflect the quantity at hand.

(b) Actual Counting Piece- This is another method used to control and supervise  inventory. It is used to actually count inventory item-by-item. This is an exhausting task and not many companies or businesses do it. Salespeople are usually involve in this process and there is a large margin of error to be considered as the salespeople go through the monotonous and tiring task of counting everything.   

(c) “Looking It Over”- The third method is “Looking over” the inventory. It is the easiest and cheapest way of controlling and supervising inventory, but there is bound to be errors. With this method, it is hard to pinpoint the inventory levels, the items that need to be ordered, and the items that the store is overstocked with. Almost all financial statements that include inventory figures based on this method cannot be completed accurately. 

Second: 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: 

• • Ordering Cost- Cost of replenishing Inventory
  • Carrying Cost- Cost of holding an item in inventory
  • 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

On conclusion, Business must have methods and procedures that offer ample flexibility to meet unusual and sometimes unreasonable demands on their resources -- personnel, equipment and facilities and operational. Exceptional customer service also includes providing top quality products at reasonable costs.

Businesses must keep a careful rein on their inventories. Having too much inventory and/or not having enough stock is considered primary direct causes of business failures.

There are several definitions of Inventory Management. Among them are:

Inventory Management is “the practice of planning, directing and controlling inventory so that it contributes to the business' profitability”. Inventory management can help business be more profitable by lowering their cost of goods sold and/or by increasing sales.

Inventory Management is “making sure that items are available when customers call for it, but not too much stock so that inventory turnover goals are met”                                                                                   - Juhi Gonzales, Inventory Management and Systems Consulting- Inventory Management is “the art and science of managing to have the RIGHT PRODUCT, at the RIGHT TIME and PLACE, in exactly the RIGHT AMOUNT, at the BEST POSSIBLE PRICE”. 

Reference: Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (). p.-, p.,p. 

The key decision in manufacturing, retail and some service industry businesses is how much inventory to keep on hand. Inventory is usually a business’s largest asset. The instant inventory levels are established, they become an important input to the budgeting system. Inventory decisions involve a delicate balance between three classes of costs: ordering costs, holding costs, and shortage costs.

Reasons to Hold Inventory

Most businesses hold inventory for many reasons. Among them are:

• • 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.

    The success of a business depends on how well the owner(s)’s ability to maintain adequate quantities of items sold. Records provided by an inventory control system should call attention to the need  for reorder when necessary or eliminate “dead wood” inventory when called for. Inventories are controlled and supervised by three (3) methods:

(a) Perpetual Inventory Control- The perpetual method is the most frequently used method. It is more costly than the other two but it is an efficient way of keeping count. In this system, complete data records are kept on each item of merchandise and additions or subtractions are made with each transaction. There is an inventory balance plus a receipt of sale, minus the actual sale to reflect the quantity at hand.

(b) Actual Counting Piece- This is another method used to control and supervise  inventory. It is used to actually count inventory item-by-item. This is an exhausting task and not many companies or businesses do it. Salespeople are usually involve in this process and there is a large margin of error to be considered as the salespeople go through the monotonous and tiring task of counting everything.   (c) “Looking It Over”- The third method is “Looking over” the inventory. It is the easiest and cheapest way of controlling and supervising inventory, but there is bound to be errors. With this method, it is hard to pinpoint the inventory levels, the items that need to be ordered, and the items that the store is overstocked with. Almost all financial statements that include inventory figures based on this method cannot be completed accurately.

Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventory or under inventory both cause financial impact and health of the business as well as effect business opportunities

Inventory holding is resorted to by organizations as hedge against various external and internal factors, as precaution, as opportunity, as a need and for speculative purposes

Thanks for the invite, I agree with answer mrs Ghada .

Sorry i can not add any thing than MRS GHADA

Why we want to hold the Inventories? Hold the Inventories if we have a pending Transaction that affects to our Stocks.

Why we do not want to hold the Inventories? Annual,Monthly,Weekly  Inventory can determined if we have loss from our stocks, so it is better to update our Inventory to prevent lossing of our Value Stocks,

agree with the experts................

Inventory management is the backbone for any organization. It is an essential component that every organization must maintain for various purposes.Business gets affected in case of both over inventory and under inventory, so one should try to keep a balanced inventory. Inventories are put on hold for various use cases which are given below. Why do we want to hold the inventories? 1. To take advantage of the scale economy to reduce the fixed ordering cost and switch over times. We call such inventory as cycle stocks2. To protect against uncertainty i.e. to prepare for unexpected demand surge or supplier may stock out. Inventory carried out for this is called safety purposes.Bus take advantage of price discounts. We call such inventory as forward buy stock.4. To ship product over a long distance that is inventory is in transit , inventory carried out for this is called pipeline stock.5. To make up for the limited production capacity i.e. some time needed to hold the inventory  for the seasonal demand due to limited production capacity, such inventories are called the prebuilt stocks. Why do we not want to hold the inventories? 1. Holding inventory requires additional space and handling, which will increase the cost.2. The money tied up in the inventory can not be invested elsewhere hence its a loss of purposes.Busentory often gets damaged which leads to loss of investment.4. Too much inventory may hide problems in the manufacturing/ production process causing quality issues.

Agree with mr. wasi and Ms. Ghada

Thanks for invitation

I amagreeing with my colleague’s answer Ms. Ghada Eweda  

Thank You for the invitation ... I would agree with the answers that really covered your question .. Variety of correct info and opinions !