Benefits on Holding Inventory

4. Benefits on holding inventory despite the incurrence of high carrying costs.

1. Avoiding Lost Sales

• Without the necessary goods in hand, which are ready to be exploited, most businesses will surely lose its business and market share. There have some customer are willing to wait, when the product they want to be made an order or it is not widely available from your competitors. So that, we must prepare enough goods to provide product demanded from our customers.
• For instance, Shelf Stock is items that are stored and sold with a little or no modification to our customers. Let take an example of an automobile industry. An automobile has an item of Shelf Stock. The customers may or may not request minor variations, the basic item produces by the factory and it’s sold as a standard item. The same principle applies to for many items from heavy machinery, consumer products or light industrial goods.

1. Gaining Quantity Discounts

• Bbenefit’s on holding inventories is let our company can make bulk purchase on raw materials and gain quantity discounts. The suppliers of raw materials are willing to give generous discounts by reducing the price of raw material and components parts if it is purchase a lot of number. As a business owner who are willing to place a large order of certain materials from regular suppliers may allow your company to receive discounts on regular prices, so it will decrease our cost and achieve more competitive price in our market. These discounts will reduce the cost of goods and increase profits earned on sale.

1. Reducing Order Cost

• By ordering in large numbers, it will reduce the cost. Some of the cost involves when making an order is forms that must be completed, approvals need to be obtained, and the goods arrive must be accepted, inspected and counted. Then, an invoice must be issued and payment must be made. The cost of receiving materials may be varying according to the numbers of orders made. By making a large of orders, the number of orders will reduce and lessen the cost involved.

1. Achieve Efficient Production Runs

• Start-up Cost incurred when a company sets up its labour and machines to produce goods. The cost then absorbed when production begins. The cost will reduce to begin the production of the goods if the processes of producing run longer.
• Example; If it cost $10,000 to setup machinery and assembly line to produce sofa chair. If 1000 sofa chairs can produce in a single-three day run, the cost of absorbing the start-up expenses is $10 per unit (10,000/1,000). If the run could be doubled to 2000 units, the absorption cost will become to $5 per unit (10,000/1,000).
• When your company frequently setting up its production line, it will increase its start-up cost. Holding an inventory to make sure the production line will never ran out of raw materials will ensure longer run in your production line, so to make lower the start-up cost.

1. Reducing risk of production shortages

• A Company is necessary to stored large amount of raw materials and unprocessed components. Manufacturing companies process with thousands, if not millions of components. If one single component ran out of stock, the entire production line would be stop. Just imagine million dollars of machinery and labour stop working in the production line, even is a shortage of nuts and bolts in the component stock, company are at risk of losing a lot of money.
• To avoid that risk, company must have a own inventory management system. The system will prevent the shortage of vital raw materials and components needed to produce goods. The system will manage and notify any shortages before it’s materialized. Inventory management system are suitable to maintaining large quantities of stocks and always keep your inventory on check and make sure safetly.