Introduction to Inventories - Operations, Logistics Management | Principles and Practice of Accounting - CA Foundation PDF Download

Operations

Inventory
DEFINITION OF INVENTORY

Inventory may be defined as ‘usable but idle resource. Inventory management is the job basically done for maintaining the stock.

The Storage and Handling System

In contrast with transportation, storage and handling of product takes place primarily at the nodal points in the supply chain network. Storage has been referred to as transportation at zero miles per hour. The costs of warehousing and materials-handling activities absorb 26 percent of a firm’s logistics dollar.

Need for a Storage System

If demand for a firm’s products were known for sure and products could be supplied instantaneously to meet the demand, theoretically, storage would not be required since no inventories would be held.

However, it is neither practical nor economical to operate a firm in this manner since demand usually cannot be predicted exactly. Even to approach perfect supply and demand coordination, production would have to be instantly responsive, and transportation would have to be perfectly reliable with zero delivery time.

This is not available to a firm at any reasonable cost. Therefore, firms use inventories to improve supply-demand coordination and lower overall costs. It follows that maintaining inventories produces the need for warehousing and handling as well; storage becomes an economic convenience rather than a necessity.

The costs of warehousing and materials handling are justified because they can be traded off with transportation and production-purchasing costs.

That is, by warehousing some inventory, a firm can often lower production costs through economical production lot sizing and sequencing. By this means, a firm avoids the wide fluctuations in output levels due to uncertainties and variations in demand patterns. Also, the warehousing of these inventories can lead to lower transportation costs through the shipment of larger, more economical quantities.

Smoothing out irregularities in supply: Inventory of raw materials provide a buffer to overcome the problems of uncertainties in supplies such as delayed deliveries and supply of short quantities by vendors.

Dealing with uncertainty of demand: The customer demand may increase suddenly, in such case an inventory of finished goods will act as a buffer against the uncertainties in demand.

Buying or producing in batches: When the demand for a good does not require its continued production, it is produced in batches. Thus during the period when the good is not being produced, demands are met from the inventory which is accumulated from the batch production.

To meet seasonal demand: When the demand is seasonal it may become economical to have inventory during period of low demand to ease the strain of peak period demand.

To take quantity discount: Inventories may also be built up take advantage of price discounts, as hedge against anticipative price rise in the future.

To maintain continuity in production process: It is necessary to maintain in-process inventories or pipeline inventories at different stages in a manufacturing process to continue production process smoothly without any work stoppage and delay.

Stock built up for Scale of economy: Inventories may also be maintained to get the economy of scale so that total cost due to ordering, carrying and backlogging are minimized.

Storage System Functions

The storage system can be separated into two important functions: - Inventory holding (storage) - Materials handling Materials handling refers to those activities of loading and unloading, moving the product to and from various locations within the warehouse, and order picking. Storage is simply the accumulation of inventory for a period of time. Different locations in the warehouse are chosen, depending on the purpose of storage