Every firm must hold adequate inventory. The main objective of holding inventories is to reduce the cost associated with investment in inventory and maintaining efficiency in production and sales operations. If a firm does not hold sufficient inventory, and makes purchases only when it is needed for production and sale arises, then the firm will not be able to offer timely delivery according to customers order.
Objectives of holding inventory may be specified as below:
1. To Avoid Losses Of Sales
One of the objectives of holding inventory is to avoid the losses of sales. If the firm holds inadequate inventory of finished goods, the form could not satisfy customer's demand timely. As a result, the customers requiring immediate supply of goods will move to the competitors, which is known as stock-out problem.
2. To Gain Quantity Discounts
Suppliers usually offer a quantity discount on bulk purchase of materials. Therefore, if a firm has relatively lower holding cost of material, it could maintain relatively larger investment in inventories to gain from the quantity discount offered by suppliers. However, it should be noted that the benefit from quantity discount must be greater than the cost of maintaining inventories.
3. To Reduce Order Costs
If a firm's ordering cost is relatively higher for order placed each time, frequent purchasing in small quantity is not economical. Therefore, placing lessor number of orders in relatively large quantity each time could reduce the variable costs associated to ordering of material.
4. To Achieve Efficient Production Run
When a firm schedules production. the firm has to maintain a fixed production set up costs for each time. Therefore, by maintaining adequate inventories the firm can set up relatively longer run of the machines so as to reduce set up cost per unit.
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