As indicated earlier inventories include stocks of raw materials, semi-manufactured or semi-processed goods or work-in-process and finished products. While trading businesses carry inventories of the merchants they offer for sale, manufacturing businesses carry inventories of all three kinds.
Raw materials inventories are maintained so that there remains some flexibility in purchasing and in production scheduling. Inventories of semi-manufactured goods ensure flexibility in production scheduling and utilization of resources, and inventories of finished products endures products scheduling and marketing.
By carrying inventories a firm can address to a large extent demand and lead time uncertainties. The principle followed is that of carrying what we call a “buffer”. Inventories can also ease out the flow of production when there are time lags in deliveries. Inventories may also help achieve some economies of scale in purchasing and help tide over the problems of seasonal variations. It follows from the above that there are several advantages to be derived from holding a large inventory, such as economies in production and purchasing and flexibility in operations. However, there are several disadvantages and costs associated with carrying large inventories and that is why we must devote our attention to the question of inventory management.
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