Inventory management is primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials.
The intent of inventory management is to continuously hold optimal inventory levels. The benefits of holding inventories are;
1. Avoiding Lost Sales
Losing business is the last part where you, as a business owner wants. Without the necessary goods in hand, which are ready to be exploited, most businesses will surely lose its business and market share. There are some customer are willing to wait, especially when the product they want must be made to order or it is not sidely available from your competitors. Thus, your business must prepare itself to provide the goods or product demanded by your customers.
For instance, Shelf Stock are items that are stored and sold with little or no modification to your customers. Let take an example of an automobile industry. An automobile is an item of Shelf Stock. The cutomers may or may not request minor variations, the basic item produces by the factory and it’s sold as a standard item. The same principle applies to for many items from heavy machinery, consumer products or light industrial goods.
2. Gaining Quantity Discounts
The other benefits of holding inventories is your company can make bulk purchase on raw materials and gain quantity discounts. The suppliers of raw materials are willing to give generous discounts by reducing the price of supplies and components parts if it is purchase in bulk. As a business owner who are willing to place a large order of certain materials from regular suppliers may allow your company to receive discounts on regular prices, thus it will lower your cost and achieve competitive price in your market. These discounts will reduce the cost of goods and increase profits earned on sale.
3. Reducing Order Cost
By ordering in large numbers, your business will reduce the cost it incurs. Some of the cost involves when making an order is forms that must be completed, approvals need to be obtained, and the goods arrive must be accepted, inspected and counted. Then, an invoice must be issued and payment must be made. The cost of receiving materials may be vary according to the numbers of orders made. By making bulk orders, the number of orders will reduce and lessen the cost involved.
4. Achieve Efficient Production Runs
Start up Cost incurred when a company sets up its labor/manpower and machines to produce goods. The cost then absorbed when production begins. The cost will reduce to begin the production of the goods if the process of producing run longer.
Take this as an example; let say it cost $10,000 to setup machinery and assembly line to produce sofa chair. If 1000 sofa chairs are produced in a single-three day run, the cost of absorbing the start-up expenses is $10 per unit (10,000/1,000). If the run could be doubled to 2000 units, the absorption cost will would drop to $5 per unit (10,000/1,000).
When your company frequently setting up its production line, it will increase its start-up cost. Holding an inventory to make sure the production line will never ran out of raw materials will ensure longer run in your production line, hence lower the start-up cost.
5. Reducing risk of production shortages
An inventory is needed to stored large amount of raw materials and unprocessed components. Manufacturing companies deals with thousands, if not millions of components. If one single component ran out of stock, the entire production line could be halted. Just imagine million dollars of machinery and manpower halted in the production line just because a shortage of nuts and bolts in the component stock, your company are at risk of losing tons of money!
To avoid that risk, your company must equip itself with its own inventory management system. The system will prevent the shortage of vital raw materials and components needed to produce goods. The system will manage and notify any shortages before it’s materialized. The inventory management system are suitable to maintaining large quantities of stocks and always keep your inventory on check!
One thought on “Inventory Control: Benefits of Holding Inventories”
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