Companies that produce and sell goods keep inventory on hand to handle customer requests. These organizations usually develop inventory policies to know how much inventory to keep on hand at a particular time. The disadvantages of maintaining a large amount of inventory are often emphasized, but companies may find it beneficial to keep a large inventory account on hand, depending on the circumstances. Understanding the advantages of holding a large amount of inventory may help you determine if it's a policy your company should implement.
Companies may stock up on inventory to handle uncertainties in the market. This type of inventory is called "buffer inventory." At times, external factors affect supply and demand in ways companies can't anticipate. Companies with a large amount of inventory can properly handle any unexpected consumer demand. Companies may also handle any mishaps with suppliers failing to deliver inventory in a timely manner. For example, a company with a large amount of inventory can operate its business as usual if shipment of inventory is delayed due to adverse weather conditions.
Receives Quantity Discounts
Companies may hold large amounts of inventory because the company receives discounts when buying in bulk, which may save money in the long run. Companies that sell raw material, for example, offer trade discounts hoping that companies purchase large quantities of raw material. Although discounts are available, inventory managers should know which type of inventory is best to buy in bulk and which type not to buy in bulk. Receiving discounts on inventory allows companies to competitively price their products, which may increase profitability.
Prepares for Increased Sales
An advantage of holding a large amount of inventory is that it allows companies to prepare for an increase in sales. For example, a company may experience a high volume of sales during the holiday season. To prepare for this time of year, the company holds a large amount of inventory to meet customer demands. Companies may prefer overstocking on inventory than to miss out on revenue because not enough inventory is on hand. Companies usually stock up on inventory during slow periods: This is beneficial for workers because it keeps them busy during nonpeak times.
Reduces Productivity Issues
Another advantage of holding a large amount of inventory is that it reduces issues pertaining to production. When a company runs out of a certain type of inventory, it may no longer be able to manufacture its products until the inventory is replenished. Work stoppage results in the firm losing money and not being able to meet customer demands. Holding a large amount of inventory makes it easier to keep up with manufacturing demands. The organization is able to continue running smoothly and satisfy its customers.
- eNotes: Inventory Types
- U.S. Small Business Association: Inventory Management
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.