Table of Contents
Benefits of Holding Inventory in a firm
Following are the benefits of holding inventory in the firm:
1. Holding Inventory avoids loss of sales
In case a firm maintains adequate inventory, it can execute the customers’ orders without any delay and thus avoid any possibility of losing the patronage of customers and hence sales.
2. Holding Inventory gains quantity discount
If the firm places a large order of certain materials, the suppliers of the materials will give generous quantity discounts by reducing the price. This quantity discount will reduce the cost of goods of the firm and increase profits earned on sale.
3. Holding Inventory reduces order cost
By ordering in large numbers, a firm can reduce the cost it incurs. Some of the cost involved when making an order is forms that must be completed, approvals needed to be obtained and the goods arrived must be accepted, inspected and counted. Then an invoice must be issued and payment must be made.
The cost of receiving materials may vary according to the number of orders made. By making bulk orders, the number of orders will reduce and minimize the cost involved.
4. Achieve efficient production runs by holding inventory
Start up cost is incurred when a firm sets up its labour/man power and machines to produce goods. The cost will then be absorbed when production begins. The cost will come down when the process of production runs longer.
When the firm frequently sets up its production line, it will increase its startup cost. Holding an inventory to make sure the production line will never run out of raw materials will ensure longer run in production line, hence lower the startup cost.
5. Holding Inventory reduces risk of production shortages
An inventory is needed to store large amount of raw materials and unprocessed components. If one single component run out of stock, the-entire production line could be halted.
To avoid the risk of shortage of essential components during a big production process, the firm should maintain inventory management. This will prevent the shortage of vital raw materials and components needed to produce goods. The system will manage and notify any shortage before it is materialized.
The inventory management systems are suitable to maintaining large quantities of stocks and always keep firm’s inventory on check.