Inventory Functions



Inventory refers to those idle resources which have economic value and thus it may be defined as usable but idle resources that have economic value.

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 procurement.
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 business.

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 operation.

Thus the functions of inventory are to :
  • Protect against unpredictable fluctuations in demand and supply
  • Take the advantage of price discounts through bulk purchases
  • Take the advantage of batches and longer production run
  • Provide flexibility to allow changes in production plans in view of changes in demands etc.
  • Facilitate intermittent production

The 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, Marketing etc.


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




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