There are many reasons why an organisation would hold inventory. The reasons will depend on the specific circumstances of the demand for the product, the supply chain processes and the position of the inventory along its supply chain. Apart from the financial implications the following reasons could be valid depending on the circumstances:
Variation in Production Demand – In a manufacturing organisation, the production plan will change in response to an increase in sales, customer demand and new product launches. Accordingly, the demand for RM supply will vary with the production plan. Holding inventories either on-site or within a warehouse (outsourced) will ensure that only the required RMs are available as and when required by production.
Unexpected Customer Demand – A customer will expect to be able to purchase a product or service as and when they require it. Therefore an organisation will hold inventory to ensure they can meet any unexpected demand.
Seasonal Demand – With major events occurring during the year and the main seasonal holiday periods, an organisation will need to hold inventory in order to lessen the pressure of seasonal demand. For example, with the Christmas period, retail outlets, as well as other businesses, would need to prepare to meet and stabilise customers’ demands. If the organisation has not prepared for this additional demand by increasing inventory, they would not be able to satisfy their customers….a major loss of profits for any organisation.
Price Discounts – When a business purchases goods from manufacturers and suppliers, they are usually offered price discounts if they buy in bulk. These discounts are provided in order to attract and maintain regular buyers. Taking advantage of price discounts can be beneficial at times; however, it is important not to purchase too much inventory. For example, a Christmas card retailer over-orders on inventory just in case. At the end of the Christmas period, they would be left with inventory that cannot be sold.
Avoiding Price Increase – Businesses usually hold inventory to mitigate against the ever-fluctuating market price of RMs. Thus, by having an efficient inventory system, businesses can control their inventory cost.
Some other reasons why an organisation may hold inventory:
- Protect against Supply Chain problems;
- Replace defective items;
- Improve the organisation’s balance sheet; and
- Enable the producer of the product to utilise capacity.
Now we know our trainers are going to be a huge success so it is vital that there is an effective inventory management system in place and that the warehouse team can locate stock and supplies promptly.