The investment in inventory is very high in most of the organisations engaged in manufacturing, wholesale and retail trade. The amount of investment is sometimes more in inventory than in other assets.
About 90% part of working capital is invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc.
The purpose of inventory management is to keep the stock in such a way that neither there is overstocking nor understocking. The overstocking will mean a reduction of liquidity and starving of other production processes. Understocking, on the other hand, will result in stoppage of work. The investment in inventory should be kept under reasonable limits.
The main objectives of inventory management are operational and financial. The operational objectives mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective mean that investments in inventories should not remain idle and minimum working capital should be locked in it. The followings are the objectives of inventory management:
1. To ensure continuous supply of materials spares and finished goods so that production should not suffer at any time and the customer’s demand should also be met.
2. To avoid both overstocking and under-stocking of inventory.
3. To maintain investment in inventories at the optimum level as required by the operational and sales activities.
4. To keep materials cost under control so that they contribute in reducing cost of production and overall cost.
5. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralising purchases.
6. To minimise losses through deterioration, pilferage, wastages and damages.
7. To design proper organisation for inventory management. Clear cut accountability should be fixed at various levels of the organisation.
8. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores.
9. To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality stocks. The price analysis, the cost analysis and value analysis will ensure payment of proper prices.
10. To facilitate furnishing of data for short term and long term planning and control of inventory.