ADVANTAGES OF INVENTORY No business can operate without inventories. It needs inventory as a protection against uncertainty, for efficient processing of material, and to permit transit and handling. So the companies carry inventory for following reasons: 1. Uncertainty of demand: Uncertainty of demand and lead ±time necessitate building of safety stock. These are also called as ³buffer stocks´. Larger the uncertainty of demand and supply; the larger will have to be the amount of buffer stock. Inventories protect him against unforeseen failures in supply or increase in demand. Even a tire on a supplier¶s delivery truck could interrupt production if it delayed a shipment of needed material. Inventories protect production against non anticipated delays. 2. Uncertainty in lead-time: The supplier is usually not in a position to supply goods as per decided dates or as he promises. In the context of the vendors in India it is observed that there is a rather rare supplier who supplies as per promises and of the quality essential. This situation leads to overstock the quantity.
3. Time lag in deliveries: Time lag in deliveries also necessitates building of i nventories. nventories. If the t he replenishment replenishment lead times are positive then stocks are needed for system operation. 4. Stock built up for scale of economy: Stocks may be maintained to get the economy of scale so that total system cost due to ordering, carrying inventory and backlogging are minimized. Unit cost normally is lowest when material is purchased, handled, and processed in large quantities, which in turn generates larger inventories. In addition, inventories act as a ³ cushion´ between operations or processes.
5. Pipeline inventory: Stock may build up as a pipeline inventory or work-in-process inventory due to continuation of production and transportation rates. This includes materials actually being worked on or moving between work centers or being in transit to distribution centre and customers.
6. Seasonal demand: When the demand is seasonal, it may become economical to build inventory during periods
of low demand to ease the strain of peak period demand
7. Quantity discounts: Inventory may also be built up for other reasons such as: quantity discounts being offered by suppliers, discount sales, anticipated increase in material price, possibility of future nonavailability, etc.
8. Transport: Materials may be transported thousands of miles before they are incorporated into an end product.
9. Ease of production system: Company sales and manufacturing department find it convenient to have stocks that are more than required. The marketing as well as manufacturing persons feel the safe and secured. Scheduling, production control and inventory management are more difficult and costlier when stocks are kept at optimum level. The manufacturer may lack the skills necessary for such control or be unwilling to incur the control costs, so he carries extra inventory in order to prevent stock units.
10. Future cost increase: Sometimes the material manager expects prices of materials to rise in near future. So he purchases stock at lower prices.
Disadvantages of High Inventory Having high inventory levels generally means your company is struggling to turn over inventory and make sales. When you have a high level of inventory, you face significant costs and inventory management requirements that have disadvantages relative to companies that have better inventory turnover and require less resource utilization to manage inventory.
Poor Turnover Companies typically want to produce or maintain only enough inventory to meet immediate demands and to avoid stockouts. When companies have excessive amounts of inventory, they
are generally not selling enough to prevent inventory buildup. This is not a good situation as businesses need to turn over inventory efficiently to maintain reasonably high profit margins and to avoid the costs and other disadvantages that come with high levels of inventory.
High Costs Carrying excess inventory has significant costs. One of the highest costs for many companies is financing the purchase and holding of inventory. Also, the more inventory you hold, the more you have to spend on labor to manage it, space to hold it, and in some cases, insurance to protect against its loss or damage. Physically counting and monitoring the levels of inventory you hold also takes time and has costs.
Loss or Damage Related to the high costs of high inventory, some inventory can also go bad after a certain amount of time and go to waste. When retailers buy excess inventory of perishable food items, for instance, they may have to throw out inventory that spoils or becomes rotten. When you carry high inventory, you also have greater exposure to lost or damaged product. Thieves have more products to choose from and you have greater potential for product to turn up missing or broken when you count inventory.
Strategic Planning Time Company leaders typically have to spend more time in strategic planning meetings when the company has high inventory levels. Management must figure out how to communicate with suppliers, how to improve ordering processes or how to increase market demand to reduce the high levels of inventory. This problem takes away from the ability of these managers to focus on other proactive or more important strategic decisions to move the company forward. Dealing with inventory problems is a more reactive strategy to resolve the issue at hand.
