Identify key reasons that organizations may need to hold inventories.
What factors may lead an organization to change the level of inventories that it holds?
How could such a decision affect the other elements of working capital?© BrainMass Inc. brainmass.com October 10, 2019, 1:28 am ad1c9bdddf
Reasons for Inventory Holding
An organization holds several types of inventories that tied-up the firms' capital at the same time some expenses also incur in the form of storage and transportation cost. But at the same time, holding of inventory by a firm has many purposes that are as follows -
To ensure production: In the absence of the adequate stock of raw material the production process may be hampered as it is quite difficult to procure the raw material by the firm as it needed. It is because; a time leg is there between placing an order and receiving the goods.
Reduction in order cost: Each order for inventory incurs some cost for the organization. In order to reduce the order cost the firms also need to hold inventories (Shim & Siegel, 2000).
To obtain quantity discounts: If a firm holds large amount of inventories for a particular product line then it may be able to purchase the quantity in bulk at large quantity discounts. It would reduce the overall cost of the business. It is also the reason for the firms to hold inventories.
Avoiding losses of sales: The holding of inventory also enables the firm to avoid the losses of sales. It is because; if a firm doesn't have goods for sales then it will lose its sales amount that will affect its profitability. Customers require ...
The main purposes of holding inventory are explained here along with the factors that determine inventory levels in this solution on inventory management that consists of 869 words and 5 references.