STUDENTS' CORNER - 60
Inventory Management is another important tool of immense consequence for business and ensuring optimum inventory is the strategic centre of inventory management. To maintain business profitable steadily, ensuring optimum inventory is a must so that the production goes on uninterrupted bringing in profit. Inventory is a list of things required for the production and optimum inventory means keeping the necessary materials and men to continue with production with least wastage of money and time. Inventory which actually means stocking things can be in two levels, generally: over-stocking and under-stocking. Optimum inventory is neither of the two. And optimal inventory planning aims to avoid both over-stocking and under-stocking since both of them adversely affect financial status of a business, a company.
What are the disadvantages of over-stocking?
Apart from the fact that over-stocking reflects inability to assess market demands rightly, it takes off the financial strength of the company, so to say. That is, the money of the company is locked up in materials that are not needed immediately for production and sale and this locked-up capital could be used for some other business purpose. This money does not bring any additional money to the company and any money that does not fetch more money is dead money. Next, the load of the excess materials occupies space which could be used more efficiently for business and this occupation of the space demands money in the form of rent and labour to shift and to protect; labour cost is another burden on the company. But the materials must be protected; so, all these necessary expenses though avoidable cut into the profit of the company. Again, some products may need insurance which is again expensive. Thus, over-stocking affects finance of the company.
What are the disadvantages of under-stocking?
.To put it simply, under-stocking means keeping materials less in quantity than what the company must actually have to have the production run unbroken. Under -stocking has some disadvantages and let us some of them in brief. First, the production process is disturbed and this fault leads to some other serious consequences to the business. Having not enough produce to the level of immediate requirement does affect the delivery schedule. It means ultimately the customer of the company does not get the product in time and he is disappointed. There is every possibility that the customer may switch to another company’s product. Loss of a customer is a loss of a source of revenue. And it is well-nigh impossible to get back the customer.
Earlier excess production may be cited as the reason for present under-stocking. Taking it for granted, there is still a disadvantage; the company, in order to retain the workforce, has to shell out wages to the employees without work because production has stopped due to under-stocking. This a waste of capital and human labour and time since it does not end up in any production that promises profit. Apart from the fact that this situation actually escalates the administration cost, there is a possibility that the company may fail to meet any unexpected demand from the customers.
There are many more facts we can study with regards to Optimum Inventory. It is enough for the present to know that optimum inventory signifies avoiding over and under-stocking.