Meaning and Definition of Inventory
In dictionary meaning of inventory is a “detailed list of goods, furniture etc.” Many understand the word inventory, as a stock of goods, but the generally accepted meaning of the word ‘goods’ in the accounting language, is the stock of finished goods only. In a manufacturing organization, however, in addition to the stock of finished goods, there will be stock of partly finished goods, raw materials and stores. The collective name of these entire items is ‘inventory’.
The term ‘inventory’ refers to the stockpile of production a ...view middle of the document...
In Japan industries have adopted concept of JIT (Just in Time) and components, materials are received when required for which detailed instructions are given to suppliers. There are many engineering companies who receive components directly at assembly point and that too only for 3-4 hours requirements at a time.
As against this by and large in India the inventory of coal, raw materials and packing materials is very high and many items become junk or obsolete causing heavy loss to the enterprise. Lack of inventory planning in India has been pointed out by various committees but due to uncertainties in supplies, problem of timely receipt of railway wagons, lack of planning and unreliable suppliers the investment in inventories is quite high. The fluctuation in demand affects inventory of finished product of which cement industry has been a victim many times.
Objectives of Inventory Management
The primary objectives of inventory management are:
(I) to minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares.
(ii) To keep down capital investment in inventories.
Dangers of excessive inventories are:
(I) The unnecessary tie up of the firm’s funds and loss of profit.
(ii) Excessive carrying cost, and
(iii) The risk of liquidity.
The effective inventory management should
(i) Maintain sufficient stock of raw material in the period of short supply and anticipate price changes.
(ii) Ensure a continuous supply of material to production department facilitating uninterrupted production.
(iii) Minimize the carrying cost and time.
(iv) Maintain sufficient stock of finished goods for smooth sales operations.
(v) Ensure that materials are available for use in production and production services as and when required.
(vi) Ensure that finished goods are available for delivery to customers to fulfil orders, smooth sales operation and efficient customer service.
(vii) Minimize investment in inventories and minimize the carrying cost and time.
(viii) Protect the inventory against deterioration, obsolescence and unauthorized use.
(ix) Maintain sufficient stock of raw material in period of short supply and anticipate price changes.
(x) Control investment in inventories and keep it at an optimum level.
Problems faced by management:
(i) To maintain a large size inventories for efficient and smooth production and sales operation.
(ii) To maintain only a minimum possible inventory because of inventory holding cost and opportunity cost of funds invested in inventory.
(iii) Control investment in inventories and keep it at the optimum level.
Inventory management, therefore, should strike a balance between too much inventory and too little inventory. The efficient management and effective control of inventories help in achieving better operational results and reducing investment in working capital. It has a significant influence on the profitability of a...