Inventory Management-1

Today we continue out talk on inventory management. Therefore, return investment can improve if the return on sales improves and/or if the turnover ratio improves. Since, the two major components, of total investment are fixed capital or fixed assets (like, land and buildings, plant and machinery, furniture and fixture, motor vehicles, etc.) and working capital, proper management of working capital so as to avoid unnecessary blockage of funds in this area and to ensure that the optimum level of investment is made will make room for reduction in the investment and thus pave the way for a higher return on investment. (This would happen when the turnover of investment improves as the denominator declines.)

 

MOTIVE FOR HOLDING ENVENTORIES 

It is possible to identify three major movies for holding inventories.

• The transaction motive peoples a business to maintain inventories so that there are no bottlenecks in production and/or sales. It is natural for a business to plan inventory investment commensurate with the level of transactions in the business. The business seeks to ensure that on the shop floor production does not get stalled for want of materials, etc., and sales do not suffer on account of not-availability of finished goods.