In businesses mainly manufacturing concerns, raw material are processed to produce final goods. And those goods which are still in processing are called work in progress goods. These inventory are very important for the business as these are the main source of revenue generation for the business. However there are costs associated with inventory as well. These are inventory storage costs, carrying costs, holding costs, spoilage costs, ordering costs and obsolescence costs. On the other hand if the inventory is too low, business can lose on potential sales and potential market share also.
To keep check on inventory costs and keeping sufficient inventory in hand various forecasts and strategies are used. One of them is Just in time inventory, where in the goods are received as inventory only when they are needed.
Reasons to keep inventory:
1. Time – Lead time of supply from the supplier till the user.
2. Seasonal Demand – Some items like firecrackers have seasonal demand but the manufacturer’s capacity is fixed.
3. Economies of scale – By giving higher orders one can reap in the benefits of bulk buying thus accumulating high inventory.
4. Uncertainty – There is uncertainty in terms of availability of material as well.