Purchase, production and sale departments are mainly concerned with the management of inventories. Their officials always try to have large stocks of inventories to facilitate production and marketing of the product .It requires large amount of investment in inventories, and shall increase the cost of the product by the amount of interest payable on such investment .It is, therefore, the prime responsibility of the financial executives to have a proper management and control over the investment in inventories so that it should not be unprofitable for the business .For this purpose, financial management should take care of the maximum and minimum limits of stock of inventories in the business to have a continuity in production process .
The inventory management includes the following aspect-
(i) Size of inventory – Maximum and minimum level,
(ii) Establishing timing schedules, procedures, and lot of sizes for new orders,
(iii) Ascertaining minimum safety levels
(iv) Coordinating sales, production and inventory policies;
(v) Providing proper storage facilities
(vi) Arranging the receipts, disbursements and procurement of materials and developing the forms of recording these transactions;
(vii) Assigning responsibilities for carrying out inventory control functions; and
(viii) Providing the report necessary for supervising the over all activity.
It is therefore necessary that the proper coordination must be there in the activities and policies of the purchase, production and sales departments to affect the better inventory control management.
OBJECTIVES AND SIGNIFICANCE OF INVENTORY MANAGEMENT.
Inventory management has become unavoidable in the present day manufacturing process. The basic managerial objectives of inventory control are two fold: - First to avoid over investment and under investment in inventories and the Second to provide the right quantity of goods of right quality at proper time and at proper value. The objectives of inventory management may be discussed under two heads
(a) operating objectives and (b) financial objectives as follow: -
(A) Operating Objectives
1) Availability of Materials. The first and the foremost objective of inventory management is to make all types of materials available at all times whenever they are needed by the production departments so that the production may not be held up for want of materials. It is therefore advisable to maintain a minimum quantity of all types of materials to move on the production on schedule.
2) Minimizing the Wastage. Inventory control is essential to minimize the wastage at all levels i.e. during its storage in the godowns or at work in the factory. Normal wastage should strictly be controlled. Wastage of materials by leakage, theft, embezzlement and spoilage due to rust, dust or dirt should be avoided.
3) Promotion of Manufacturing Efficiency. The manufacturing efficiency of the enterprise increases if right types of raw material are made available to the production department at the right time. It reduces wastage and cost of production and improves the morale of workers.
4) Better Service to Customers. In order to meet the demand of the customers, it is the responsibility of the concern to produce sufficient stock of finished goods to execute the orders received. It means, a flow of production should be maintained.
5) Control of Production Level. The concern may decide to increase or decrease the production level in favorable time and the inventory may be controlled accordingly. But in odd times, when raw materials are in short supply. Proper control of inventory helps in creating and maintaining buffer stock to meet any eventuality. Production variations can also be avoided through proper control of inventories.
6) Optimal Level of Inventories. Proper control of inventories helps management to produce materials in time in order to run the plan efficiently. It thus, helps in the maintaining the optimum level of inventories keeping in view the operational requirements. It also avoids the out of stock danger.
(B) Financial Objectives
1) Economy in Purchasing. Proper inventory control brings certain advantages and economics in purchasing the raw materials. Management makes every attempt to purchase the raw materials in bulk quantity and to take advantage of favorable market conditions.
2) Optimum Investment and Efficient Use of Capital. The prime objective of inventory control from financial point of view is to have an optimum level of investment in inventories. There should neither be any deficiency of stock of raw materials so as to hold up the production process nor should there be any excessive investment in inventories so as to block the capital that could be used in an efficient manner otherwise. It is, therefore, the responsibility of financial management to set up the maximum and minimum levels of stocks to avoid deficiency or surplus stock positions.
3) Reasonable Price. Management should ensure the supply of raw materials at reasonably low price but without sacrificing the quality of it. It helps in controlling the cost of production and the quality of finished goods in order to maximize the profits of the concern.
4) Minimizing Costs. Minimizing inventory costs such as handling, ordering and carrying costs, etc., is one of the main objectives of inventory management. Financial management should help controlling the inventory costs in a way that reduces the cost per unit of inventory. Inventory costs are the part of total cost production hence cost of production can also be minimized by controlling the inventory costs.
