OBJECTIVES AND BENEFITS OF HOLDING INVENTORY

List of Objectives for Holding Inventory by a Firm, is briefed with Examples for each. Along with this, the Different types of Benefits in terms of Cost, while holding Inventory by a Firm, is also explained.

1. OBJECTIVES & BENEFITS
of
HoldingINVENTORY
BY
N ILANGO
Assistant Professor, Department of MBA
Sri Ramakrishna College of Arts & Science, CBE

2. Holding Inventory: OBJECTIVES with Examples
1. Ensure Continuous Supply
Preventdisruptionsinproductionorcustomerserviceby
maintainingadequatestocklevels
Eg:Acarmanufacturingcompanyensuresithasasteadysupply
oftires&enginestoavoidhaltingproduction
2. Minimize Inventory Costs
Reducecostsassociatedwithholding,ordering&managing
inventory
Eg:Aretailerusesjust-in-time(JIT)inventorytominimize
storagecosts&avoidoverstocking
3. Optimize Inventory Levels
Avoidoverstockingorunderstockingbymaintainingright
amountofinventory
Eg:Agrocerystoretracksseasonaldemandtostockmoreice
creaminsummer&reducestockinwinter

3. Holding Inventory: OBJECTIVES with Examples
4. Improve Customer Satisfaction
Ensureproductsareavailablewhencustomersneedthem,
improvingservicelevels&loyalty
Eg:Ane-commercecompanymaintainsarobustinventoryof
popularitemstoensurefastdeliverytocustomers
5. Avoid Stockouts& Overstocks
Balanceinventorytopreventshortagesorexcessivestockthat
leadstowastageorobsolescence
Eg:Apharmaceuticalcompanymonitorstheshelflifeof
medicinestoavoidoverstockingitemswithshortexpirationdates
6. Support Production Efficiency
Ensurerawmaterials&componentsareavailabletoavoid
productiondelays
Eg:Afurnituremanufacturerkeepsasteadyinventoryofwood,
nails&varnishtoensureuninterruptedproduction

4. Holding Inventory: OBJECTIVES with Examples
7. Reduce Lead Times
Minimizetimebetweenordering&receivinginventory
Eg:Aclothingretailerworkswithlocalsupplierstoreducelead
times&quicklyrestockpopularitems
8. Facilitate Accurate Financial Planning
Provideaccurateinventorydataforbudgeting,forecasting&
financialreporting
Eg:Atechcompanyusesinventorymanagementsoftwareto
trackinventoryvalueforquarterlyfinancialstatements
9. Enhance Supply Chain Coordination
Collaboratewithsuppliersanddistributorsforsmoothsupply
chainoperations
Eg:Arestaurantchainsharesreal-timeinventorydatawith
supplierstoensuretimelydeliveryoffreshingredients

5. Holding Inventory: OBJECTIVES with Examples
10. Minimize Losses Due to Obsolescence or Spoilage
Preventinventoryfrombecomingobsoleteorspoiledbycareful
monitoring&turnover
Eg:Abakeryusesafirst-in,first-out(FIFO)systemtoensure
olderingredientsareusedbeforenewerones
11. Adapt to Market Changes
Adjustinventorylevelsbasedonchangingcustomer
preferencesormarkettrends
Eg:Atoyretailerincreasesstockofatrendingtoyduringholiday
season
12. Improve Profit Margins
Reducecosts&improveoperationalefficiencytomaximize
profitability
Eg:Anelectronicsretailernegotiatesbulkdiscountswith
suppliers&maintainsoptimalstocklevelstoboostprofitmargins

6. Benefitsof Holding Inventory
1.MeetVariationinProductionDemand:
Productionplanchangesinresponsetothesales,estimates,
orders&stockingpatterns
Accordinglydemandforrawmaterialsupplyforproduction
varieswithproductplanintermsofspecificSKU(stock-keeping
unit)aswellasbatchquantities
Holdinginventoriesatanearbywarehousehelpsissuerequired
quantity&itemtoproductionjustintime

7. Benefitsof Holding Inventory
2.CatertoCyclical&SeasonalDemand:
Marketdemand&suppliesareseasonaldependingupon
variousfactorslikeseasons,festivals,etc.,
Pastsalesdatahelpcompaniestoanticipateahugesurgeof
demandinmarketwellinadvance
Accordinglytheystockuprawmaterials&holdinventoriesto
beabletoincreaseproduction&rushsuppliestomarkettomeet
increaseddemand

8. Benefitsof Holding Inventory
3.EconomiesofScaleinProcurement:
Buyingrawmaterialsinlargerlot&holdinginventoryisfound
tobecheaperforcompanythanbuyingfrequentsmalllots
Insuchcasesonebuysinbulk&holdsinventoriesatplant
warehouse

9. Benefitsof Holding Inventory
4.LongLead&HighDemandItemsneedtobeheldin
Inventory:
Oftenrawmaterialsuppliesfromvendorshavelonglead
runningintoseveralmonths
Ifparticularitemisinhighdemand&shortsupplyonecan
expectdisruptionofsupplies
Insuchcasesitissafertoholdinventories&havecontrol

10. Benefitsof Holding Inventory
5.TakeAdvantageofPriceIncrease&QuantityDiscounts:
Ifthereisapriceincreaseexpectedfewmonthsdowntheline
duetochangesindemand&supplyinnationalorinternational
market,impactoftaxes&budgetsetc,.thecompanytendtobuy
rawmaterialsinadvance&holdstocksasahedgeagainst
increasedcosts
Companiesresorttobuyinginbulk&holdingrawmaterial
inventoriestotakeadvantageofquantitydiscountsofferedby
supplier
Insuchcasessavingsonaccountofthediscountenjoyedwould
besubstantiallyhigherthatofinventorycarryingcost

11. Benefitsof Holding Inventory
6.ReduceTransitCost&TransitTimes:
Insteadofimports(Vendorfaraway),nearbyvendorscanbe
arrangedwithinthecountry;Cansavelotintransportationcost
Buyinginbulk&transportingasacontainerloadorafulltruck
loadcansavecost;Partshipmentscanbecostlier
Transittimeforfullcontainershipmentorafulltruckloadis
direct&fasterunlikepartshipmentload
Factorslikeshippingdelays&transportationcanhamper
supplychain,forcingcompaniestoholdsafetystockofraw
materialinventories