For many business owners inventory is one of the most visible and tangible aspects of doing business. Inventory refers to stocks of anything necessary to do business. Various forms of inventory are represented by the stock of resourcs (raw materials, fuel, components, spare parts supplies) used in an organisation, work in progress and finished sale to distributors or final users. These stocks represent a large portion of the business investment and must be well managed in order to maximise profits. Successful inventory management involves balancing the costs of inventory with its benefits. The costs of having inventory include direct costs of storage, insurance, taxes and ties up capital, which may lead to a severe crisis. Good inventory management improves customer service, increases sales and profits. If inventories are not controlled they are unreliable, inefficient and costly.
Managers often try to keep high inventory levels. There are obviously advantages of having a large inventory of raw materials and component parts. It gives you protection against many negative factors, such as price rises and delays in the delivery of raw materials due to shortages, strikes, lost orders, incorrect or defective shipments, and so on. You can also take advantage of quantity discounts in purchasing. Having a large inventory of finished goods allows you to quickly react to changes in product demand and to be more flexible in product scheduling. There is no risk of losing customers or that new competitors will enter the market.
On the other hand, keeping a large inventory involves various additional costs: storage requires warehousing facilities, handling goods involves labour costs and unsold goods have to be insured. All this money could be more profitably spent in other ways. Furthermore, there is always a risk of obsolescence, especially for high-tech products, and the risk of theft or breakage. If an inventory of finished goods gets too large, it may be necessary to reduce prices to stimulate demand.
All disadvantages of large inventories led to the development of the just-in-time (JIT) production system (see Reading IV), which does away with inventories. This approach has had a major impact on the development of inventory management.
