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Purpose Of Inventory

Purpose of Inventory Assignment / Homework Help
The purpose of storing inventory is to make the finished products available for sale. Selling activity in no scenario should be stopped for want or shortage of inventory. Hence, businesses store inventory despite the costs of holding inventory.

Functions and purpose of inventory:

The basic function of inventories is to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued at exactly the same rate. The key activities are:
  • Purchasing
  • Production and
  • Selling.
Inventory storage functions in such a way that these activities can be carried on independently.

Advantages of holding inventory
  • Advantages in Purchasing

    If the purchasing of raw materials and other goods is not tied to production and sales, then the company can reap a lot of advantages in purchasing inventory. In this case the company is acting independently to avail the best purchase deal. Most of the times, bulk discounts are offered by suppliers for large purchases. If the costs of holding inventory i.e., the ordering and carrying costs are lower than the benefits of storing huge inventories, the company can go ahead and avail discounts. By ordering in bulk, the company is also saving time and ordering costs. Also, at times, firms may expect a hike in price of raw materials in future. To avoid paying higher prices in future and to lower the cost of production, firms may decide to purchase and store inventory in bulk.
  • Advantages in Production function

    Inventory helps a firm to coordinate its production scheduling so as to avoid disruptions and the accompanying expenses. Because inventory permits least cost production scheduling, production can be carried on more efficiently. Finished goods inventory serves to uncouple production and sale. This enables production at a rate different from that of sales. So, production can be carried on a rate higher or lower than the sales rate. This would be of special advantage to firms with seasonal sales pattern.
  • Advantages in Work-in-Progress

    Work-in-progress inventory is necessary because production processes are not instantaneous. The inventory goes through a lot of stages before reaching the finished goods state. Partly processed inventory is called as the work-in-progress inventory. The amount of this inventory depends upon the technology used and the efficiency of production. It also uncouples the various stages of production so that all of them need not be performed at the same rate.
  • Meeting demand and avoiding lost sales

    Inventories help to meet the demand in time. There is a time lag involved in the production of a product till it reaches the final stage good for selling. During these times, stocks of inventories enable the company to carry on its sales activities without disruption for want of stock or shortage of product. If these would have been the case, customers are likely to shift to companies where the products are readily available. So inventories helps to meet the demand in time and rapidly, avoiding losing customers. Also, in case of seasonal products, inventories have to be kept to meet the demand during off-season.
  • Serves as security for short-term finance

    In some cases, companies often pledge the finished goods inventory for short-term loans. So, essentially inventories serve as good assets to provide security for such loans.

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