Business
Inventory management plays a vital role in almost any business. This is easily explains by the fact that this aspect of business management directly affects the profitability and the level of revenue. In this paper we will answer the question why inventory management requires determining the level of inventory necessary to enhance sales and profitability.
The level of revenue, profit and liquidity directly depends on how the inventory management and accounting are organized. Reducing the inventory, a company saves and releases funds but risks to loose certain opportunities as long as not all clients have the time to wait for the delivery. Though, through proper and accurate inventory management it is possible to increase the sales and to store the necessary amount of items at the stock in order to bring it in time. In order not to stop the production process because of inventory shortage caused by sudden demand increase or supply bottleneck the creation of inventory stock is needed.
Nowadays the investors pay a great deal of attention and funds trying to eliminate the inventory shortage through implementing various progressive equipment, while distributors and retailers concentrate on enhancing the current inventory management systems. The inventory management includes numerous aspects including shortage control and supply chain, logistics, distribution and warehousing.
According to James Healy (1998), distributors and retailers hold from 10 to 30 percent of supplementary or additional inventory. The storage of this unnecessary inventory leads to additional carrying expenses, loss of customers, sales and profit due to ineffective inventory management. He suggests establishing the control procedure to determine the true cost of carrying inventory and to measure the turns of it. This procedure will enable the distributor to overcome the shortfalls. In his work he states that inventory optimization process lets distributor reduce the amount of inventory they carry while improving service level, ensuring that the right stock is available in right place and time increasing profit and reducing lost sales opportunities. He also marks out the ways to achieve the inventory optimization goals.
R.L. Ballard (1996) points out that inventory control is considered to be the management function, since the monitoring of stock is regarded as a supervisory function. However, inaccurate monitoring process can result in unreliable data, while under the condition of fast-changing market environment and demand thorough and in-time inventory measurement is a vital factor that can not be neglected. He emphasizes that effective control of inventory can be performed only through gathering all necessary facts and data about the whole process, so pure stock checking and monitoring is not enough.
Joseph S. Martinis (1997) points out various reasons why entrepreneurs prefer to purchase a certain amount of inventory:
Demand fluctuations
Seasonal demand fluctuations for certain products
Discounts given for big consignments
Low expanses for shipment and slotting
The possibility of proportional product production and distribution
The possibility to offer immediate service
The simplification of production process management
Creation of inventory also enables to avoid distribution costs and to increase the revenues.
Inventory management implies constant control. In case the inventory volume exceeds the determined limitation the …