Why inventory is held by companies?
Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. There are various reasons for which the companies hold inventory. For example, suppliers hold the inventory so that the customers may not be affected by manufacture/supply delay. Again, manufacturers keep inventory because there may be lower production efficiencies if production capacity stands idle for lack of materials. Some other reasons for keeping stock include:
1. Buffer stock is held in individual workstations to handle situations when the upstream workstation may be a little delayed in providing the next item for processing.
Sometimes, overproduction stock is there when the forecast does not match with actual sales.
2. Safety stock is held against process or machine failure in the hope that the failure can be repaired before the stock runs out.
3. Lot delay stock is held because a part of the process is designed to work on a batch basis whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation.
4. Demand fluctuation stock is kept if the production is not flexible enough to keep up with the changes in demand. So, this stock is utilized when demand exceeds production capacity.
5. Changeover stock is held after a sub-process that has a long setup or change-over time. This stock is then used while that change-over is happening.
Whatever be the reason for holding these stocks, inventory management is very essential for any company. Also, stocks should be kept at minimum so that capital does not remain stuck up with excess inventory.
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