Inventory refers to those idle
resources which have economic value and thus it may be
defined as usable but idle resources that have economic
Inventory is a stock of direct or indirect material ,
from raw material to finished goods stocked in order to
meet an unexpected future demand.
In other words inventory is a physical stock of goods
kept for the future purposes.
Inventory Management or
control refers to maintaining , for a given
financial investment, an adequate supply of something
to meet an expected demand pattern. It thus deals with
determination of optimal policies and procedures for
Inventory is expressed in terms of both quantity and
monetary value. In terms of quantity , it can be
expressed as the number of units of an item lying
where as in monetary terms it is the sum total of the
monetary value of all its items.
Functions of Inventory:
Though Inventory is a blocked capital , in the
sense that it is not being used in the present, it
plays a distinct role in the life of any
organisation for a smooth and efficient running of
For example, if a firm does not have any inventory
then as soon as it receives a supply order it will
look for raw material to manufacture the items and
thus the customers shall be kept waiting.
It alone may cost the firm its customers who may not
like to wait. Further, all the internal agencies shall
have to work in emergency
for getting the
material, completing the production etc. if there is no
inventory. Inventories decouple individual phases of the total
Thus the functions of inventory
are to :
basic function of inventory is thus to insulate the
production process from changes in the environment.
It decouples various interlinked functions and thus
enables each function to conduct itself
independently like Purchasing , Production,
Why Inventory goes up or down ?
There are several reasons , the most important for a high
inventory being a
- High Lead time
- Tendency to play safe
- Stock outs and shortages lead to criticism
- Standardisation and variety reduction not given emphasis
- Uncertainty /
scarcity of items triggering over stocking
Why Inventory needs to be optimally used ?
Inventory is Blocked money , the working capital. It has a cost
(approx. 20% of Average inventory)
Opportunity cost of investment funds : Investment in external
securities / Equipments can earn a return for the company
Insurance cost : Inventory is an asset needing insurance
Storage costs : Cost is associated just for storing an item.
When large number of items are stored the following also become
costs that can not be ignored :
Obsolescence and deterioration
Damage, pilferage or obsolescence