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Inventory can be described as the raw materials, merchandise and finished and finished products alike of a company of which have not yet been sold (Song & Zipkin 2003, p. 1).
A company’s inventory represents one of the key assets of a business because the earnings obtained from the inventory signify one of the prime sources of generating revenue and which subsequently brings earnings to the involved management. In other words, they can be considered as the company’s liquid assets that can be converted into cash anytime without any difficulty. Now the inventories of a manufacturing and a service industry are not the same at all, but rather they differ in many ways.
For example, in a manufacturing industry, there are many different inventories in between the production stages before the final product is obtained. The time taken between say the raw material processing and the time that the product is semi finished and also the time taken for the final product to be assumed may vary. It may also take quite a while after the product is on the shelves during the retail stage.
Thus for a manufacturing industry, there would be a time delay between the production and consumption of the product. On the other hand, in the services industry, there is an immediate consumption of the product once it is produced. This may be reflected in the example of a food court, where the production and consumption of the food and drinks takes place simultaneously (Deshpande, Cohen & Donohue 2003, p. 683; Hoyt 2002, p. 2).
Importance of inventory
The major importance of inventory of goods and services is that it helps a company to produce the goods and services only when needed and required. This is because the having an inventory by a company for a long duration of time can be very costly for it, due to storage, spoilage, and obsolescence costs (Gravelle & Rees 2004, p. 5; ). On the other hand, having a very minute inventory can also be risky to the company as it stands to lose potential market share and sales as well (Dale 2003, p. 5).
The main issues that are involved in inventory include the costs which are included in the acquisition costs, the frequency may they be perpetual or periodic in the cost computations, the cost flow assumption, which may not really represent the physical inventory flow, used to trace cost movement and the valuation basis (Axster 2003, p. 438). These may be borne by the manufacturer, service provider or even the intermediary.
Literature notes that inventory is very important in the production and sale of products and services. The main significance is that it helps the company to know when to produce the goods and services only when needed and to know the quantity to be produced (Schroeder 1993, p. 56). This would then help in cutting overhead costs of storage among others in case of overproduction and it would eliminate the possibility of the company missing the market share and chances.
Therefore, problems of overproduction or underproduction are taken into consideration and catered for. All companies that are in the manufacturing of goods and service providing essentially use inventory. This helps them to track the process of production up until consumption and in turn, it helps them to maximize on profits by minimizing production costs (Dong & Rudi 2004, p. 645).
As a conclusion, companies that use inventories, be they good, production or service providers are at a better level of maximizing on profits and cashing in on the market chances, meeting the needs and requirements of the market. With the advent of technology (Melchiors, Dekker & Kleijn 2000, p. 111), software for inventories like Just-In-Time (JIT) is available to make work easier (Frakes & Ricardo1992, p. 46).
All these should be clearly documented in order for easier referencing. At the end of the financial year, these records should be analyzed in order to project the future market requirements for better planning (Jacobs & Chase 2010, p. 43; Muhlemann & Lockyer, 1992, p. 234).
Axster, S 2003, Evaluation of unidirectional lateral transshipments and substitutions in inventory systems, European Journal of Operational Research 149, 438–447.
Dale, B 2003, Management Quality, 4th Edn, Blackwell, Oklahoma.
Deshpande, V, Cohen, M & Donohue, K 2003, A threshold inventory rationing policy for service-differentiated demand classes, Management Science, 49, 683–703.
Dong, L & Rudi, N 2004, Who benefits from transshipment? Exogenous vs. endogenous wholesale prices, Management Science, 50, 645–657.
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