Inventories constitute the principal items in the working capital of the majority of trading and industrial companies. In inventory the stores of raw material, stock of finished goods, work-in-progress and other accessories are included. To maintain the continuity in the operations of business enterprise, a minimum stock of inventory is required. Though the physical control of inventory is the operating responsibility of stores superintendents and financial personnel have nothing to do about it but the financial control of these inventories in all lines of activity in which they comprise a substantial part of the current assets is frequently the most important problem in the management of the working capital.
Management of inventory is designed to regulate the size of the investment in goods on hand, the types of goods carried in stock and turnover rates. Adequate stocks of goods of proper quality to meet the needs of production and sales must be maintained, while at the same time the investment in them is kept at a minimum.
Meaning of Inventory Control
The term ‘inventory control’ is used in two ways-unit control and value control. Production and purchase officials use this world in term of unit control whereas in amounting this word is used in term of value control. The investment in inventory represents in many cases, one of the largest asset items of business enterprise particularly those engaged in manufacturing, wholesale trade and retail trade. Sometimes, the cost of material used in production surpasses the wages and production overheads. Hence, the proper management and control of the capital invested on the material or inventory should be the prime responsibility of accounting department.
Objectives of Inventory Control in an Organization
The basic managerial objectives of inventory control are two-fold : first the avoidance of ova-investment a under-investment in inventories; and second, to provide the right quantity of good standard raw-material to the production department at the right time when it is wanted thereon. In brief, the objectives of inventory control may be summarized as follows
A) Operating objectives
(1) Availability or Materials : There should be a continuous availability of all types of materials in the !factory so that the production may not he held up for want of any material. Minimum quantity of each material is fixed to permit production to move on schedule.
(2) Avoidance of Wastage : There should be minimum possible wastage of materials while these are being stared in the warehouses by the store-keeper or used in the factory by the workers. Wastage should be allowed. up to a certain level known as normal waste. To avoid any abnormal wastage, strict control over inventory should be exercised. Leakage, theft, embezzlement of material and spoilage of material due to rust, dust or dirt should be avoided.
(3) Promotion of Manufacturing Efficiency : If the right type of raw material is available to the manufacturing departments at the right time, their manufacturing efficiency is also increased. Their motivation level rise and moral is improved.
(4) Avoidance of out of stock Danger: Information about availability of materials should be made continuously available to the management so that planning of procurement of raw material can be done by them, it maintains the inventories at the optimum level keeping in view the operational requirements. It so avoids the out of stock dangers.
(5) Better service of Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders.
(B) Financial Objectives
(1) Economy of Purchasing : A proper inventory control brings certain advantages and economies in purchasing also. Every attempt has to be made to effect economy in purchasing through quantity and taking advantage of favorable markets.
(2) Reasonable Price : While purchasing materials, it is to be seen that it is purchased at a reasonably low price. Quality is not to be sacrificed at the cost of the lower price. Quality purchased should be of that quality alone Which is needed.
(3) Optimum Investment and Efficient use of capital : The basic aim of inventory control from financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stocks etc. Investment in inventories must not tie up funds that could be better used in other activities. The determination of maximum and minimum levels of stock are attempts in this direction.
Importance of Inventory Control in an Organization
The importance of necessity of inventory control is well explained in terms of the objects of inventory which are obtained through it. A proper inventory control lowers down the cost of production and improves the profitability of the enterprise. Here are certain specific advantages of inventory control
(1) Reduction in Investment in Inventory.
(2) Proper and Efficient use of raw Material.
(3) No bottleneck in Production.
(4) Improvement in Production and Sales.
(5) Efficient and Optimum use of Physical as well as Financial Resources.