Holding sufficient inventory helps the firm in many ways. It ensures smooth operation, provides safety against unpredictable future events, to minimize costs etc. Therefore, firms should maintain adequate level of inventory to perform business activities properly. This post highlights the main reasons of holding sufficient inventory.
Purpose, objectives or motives of holding adequate level of inventory can be described as follows:
1. Transaction Motive
Transaction motive is the main objective of holding sufficient inventory that helps smooth operation of production and proper supply of goods to meet market demand. Inventory is hold according to the production capacity, demand, average lead time, ordering cost and carrying cost.
2. Precautionary Motive
According to this motive, a business firm should hold optimum level of inventory to ensure safety against unforeseen and unpredictable future situation such as strike, shutdown, shortage, delay on supply etc. So, sufficient volume of inventory provides safety against unpredictable events.
3. Speculative Motive
Business forms wants to take benefit of price fluctuations. If there is a possibility of rise in price of raw materials or finished goods in the near future, they wish to hold large quantity of inventory and vice versa.
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4. Other Motives
There are some other objectives of holding inventory such as:
- To receive quantity discount and price discount while purchasing materials in bulk quantity.
- To minimize ordering cost and carrying cost
- To minimize production set of costs.
