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Operations Research: Why Inventory is maintained? #inventorymanagement #operationsreserach #production #bba #mba #ipumusings

Why inventory is maintained?

Operations Research: Why Inventory is maintained? #inventorymanagement #operationsreserach #production #bba #mba #ipumusings

As we are aware of the fact that the inventory is maintained for the efficient and smooth running of business affairs. If a manufacturer has no stock of goods at all, on receiving a sale order he has to place an order for the purchase of raw materials, wait for the receipt and then start his production. Thus the customers will have to wait for a long time for the delivery of the goods and may turn to the other suppliers. This results in a heavy loss of business so it becomes necessary to maintain an inventory because of the following reasons:

1.  Inventory helps in the smooth and efficient running of a business. 

2. Inventory provides service to the customers immediately or at short notice. 

3. Due to the absence of stock, the company may have to pay high prices because of piece-wise purchasing. Maintaining inventory may earn a price discount because of bulk purchasing.

4.  Inventory also acts as a buffer stock when raw materials are received late and so many sales orders are likely to be rejected. Inventory also reduces production costs because there is an additional advantage of batching and long smooth running production runs. 

5. Inventory helps in maintaining the economy by absorbing some of the fluctuations when demand for an item fluctuates or is seasonal. 

6. Pipeline stocks also called process and movement inventories are also necessary when a significant amount of time is consumed in the transhipment of items from one location to another. 

7. Through prompt supply, inventory might improve reasonable customer service. This improves client happiness and, as a result, the company's reputation.

8. It facilitates intermittent production of several product items in the same facility.

9. Efficient inventory management helps in achieving a favourable Return On Investment (ROI).

Mathematically the problem of maintaining the inventory arises due to the fact that if a person (for example, a big retailer) decides to have a large stock, his holding costs C increases, but his shortage costs C and setup costs C decrease.

On the other hand, if he has small stock, his holding costs C decrease, but shortage costs C  and setup costs C increase. 

Similarly, if he decides to order very frequently, his ordering costs increases while other costs may decrease. So it becomes necessary to have a compromise between overstocking and understocking by making optimum (most favourable) decisions by controlling the value of some variables which are at our disposal.

👉See also:

End Term Exam Paper (2015)
What is Operations Research?
Different OR Models
Linear Programming - Formulation Technique (Q & A)
Linear Programming - Finding Graphical Solution
Costs Associated with Inventory Problems