Functions, Importance of Inventory Management

Inventory means all the materials (may be raw or finished parts/components, in process or finished products, castings and consumable tools, electrodes etc.) recorded on the ledgers/books of the organization and kept in its stocks (in the store or warehouses) for some period of time.

So inventory is an essential part of an organization. Every enterprise/business or manufacturer concern however big or small has to maintain some inventory.

Functions

From the definition of inventory, it is clear that it is related to stock of raw materials, semi-finished and finished products/items maintained by the enterprise/business/organization.

The following points will explain the concept and functions of inventory:

(i) Inventories Serve as Cushions:

Against shocks due to demand/supply fluctuations, it separates different manufacturing operations from one another and makes them independent so that each operation can be performed economically.

For example, an organization has to deal with several consumers and vendors and due to their unpredictable behaviour there are always fluctuations in demand or supply of goods which disturbs the schedule of the enterprise.

Inventories absorb these fluctuations and help in maintaining undisturbed production i.e., we decouple the manufacturing activities from the consumer and vendor successfully by cushions of stocks.

Furthermore purchasing/order of raw material can be carried out independently of the finished products distribution and both of these activities can be made low cost operations say by ordering raw material and distributing products in one big lot than in small batches. Thus it leads to better utilization men and machines besides economy.

(ii) Inventory, a Necessary Evil for Any Enterprise:

Inventories require valuable space, capital and other overheads for maintaining it. The invested capital remains idle till the stocks are not consumed. On the other hand, smooth working of the organization is not possible without inventory so it is a necessity. Further it has been observed that costs of not having inventory (stock out conditions) are usually greater than costs of having them. Thus inventory is a necessary evil.

(iii) Inventory Provides Production Economies:

Purchase in desired quantities nullifies the effects of change in prices or supply. Stocks bring economy so purchase of various inputs due to discounts on bulk purchase.

(iv) Maintenance of Smooth and Efficient Production Flow:

Maintains smooth and efficient production flow thus keeps a process continually operating.

(v) Creation of Motivational Effect in Decision Making:

Creates motivational effect in decision and policy making e.g. a person may be tempted to purchase more if inventories are displayed in bulk.

Importance

The following points give the importance of inventory to an organization:

(i) Good consumer service can be provided and maintained in the organization.

(ii) Enables smooth and efficient production flow of goods/items.

(iii) Provides protection against uncertainties regarding demand and supply of materials and output.

(iv) Various production activities can be independently and economically performed,

(v) Ensure better utilization of men, machines and materials.

(vi) With bulk purchases quantity discounts can be availed.