Chapter 12

Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting.

Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation

Warehouses perhaps better referred to as distribution centers; exist primarily to facilitate

the movement of materials to the end customer.

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The fluctuation in demand affects inventory of finished product

In case of raw materials the first requirement is to study lead time between the date of order and receipt in the factory

So it is essential to have necessary inventories. Excessive inventory is an idle resource of a concern

the unnecessary tie up of the firm’s funds and loss of profit.

(ii) excessive carrying cost, and

(iii) the risk of liquidity

The excessive level of inventories consumes the funds of business, which cannot be used for any other purpose and thus involves an opportunity cost. The carrying cost, such as the cost of shortage, handling insurance, recording and inspection,

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are also increased in proportion to the volume of inventories. This cost will impair the concern profitability further.

mary 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.

So it is essential to have necessary inventories. Excessive inventory is an idle resource of a concern. The concern should always avoid this situation. The investment in inventories should be just sufficient in the optimum level. The major dangers of excessive inventories are:

(i) the unnecessary tie up of...