On account of the large size of inventories maintained by the firms, a considerable amount of funds are required to be committed in them and it is, therefore, absolutely imperative to manage the inventories efficiently and effectively in order to avoid unnecessary investments in them. An undertaking neglecting the management of inventories will be jeopardizing its long-run profitability and may fall ultimately. It is possible for a company to reduce its level of inventories to a considerable degree e.g. 10 to 20 percent without any adverse effect on production and sales, by using a simple inventory planning and control techniques.
Inventories are the goods held for eventual sale by the firm. Inventories are thus one of the major elements which help the firm in obtaining the desired level of sales. Inventories can be classified into three categories: 1. Raw materials: These are goods which have not yet been committed to production in a manufacturing firm and they may consist of basic raw materials or finished components; 2. Work in process: This include those materials which have been committed to production process but have not yet been completed and 3. Finished goods: These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory.
Need for holding inventory by the firm:
The question of managing the inventories arises only when the company holds inventories and maintaining the inventories involves typing up of the company's funds due to the shortage and handling costs....