1. To stabilize production: The demand for an item fluctuates because of the number of factors, e.g., seasonality, production schedule etc. The inventories (raw materials and components) should be made available to the production as per the demand failing which results in stock out and the production stoppage takes place for want of materials. Hence, the inventory is kept to take care of this fluctuation so that the production is smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying and to gain this price advantage the materials are bought in bulk even though it is not required immediately. Thus, inventory is maintained to gain economy in purchasing.
3. To meet the demand during the replenishment period: The lead time for procurement of materials depends upon many factors like location of the source, demand supply condition, etc. So inventory is maintained to meet the demand during the procurement (replenishment) period.
4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery schedules at 100 per cent service level, means they cannot afford to miss the delivery schedule which may result in loss of sales. To avoid the organizations have to maintain inventory.
5. To keep pace with changing market conditions: The organizations have to anticipate the changing market sentiments and they have to stock materials in anticipation of non-availability of materials or sudden increase in prices.
6. Sometimes the organizations have to stock materials due to other reasons like suppliers minimum quantity condition, seasonal availability of materials or sudden increase in prices.
Carrying Inventory can be classified under four heads depending on the need:
- Cycle Inventory: Raw materials, components, parts are required for production. This is cycle plays a crucial role in keeping the production cycle continuous. The work in progress inventory is a major part of production related inventory. Determining how frequently to order and in what quantity is called Lot sizing.
- Safety Stock: In order to avoid customer service problems and the hidden costs of unavailable components, companies hold safety stock. This gives a cushion against uncertainties in demand, lead-time, and supply therefore ensuring that operations aren‘t disrupted.
- Anticipation Inventory: This term refers to the inventory that is used to absorb uneven rates of demand or supply that businesses face. Manufacturers of air conditioners, for example, experience 90 percent of their annual demand during just three months of a year. Hence anticipation inventory helps in evening out the volatility in demand and supply. A company may stock up on certain items if its supplier threatened with a strike or have severe capacity limitations.
- Pipeline Inventory: Inventory moving from point to point in the materials flow system is called pipeline inventory. Materials move from suppliers to a plant, from one operation to the next in the plant, from the plant to a distribution center or customer, and from distribution center to a retailer. Pipeline inventory consist of orders that have been placed but not yet received. Therefore stocking locations, improving materials handling and delays in distribution should be overcome.