Q. What are the Benefits of Holding Inventories?
(1) Timing of Demand and Supply: - Requirement to hold inventory of raw materials arises because it isn't possible for a firm to procure raw materials whenever it is needed. If the firm is guaranteed of supply of raw material without delay at the rate it is used in its manufacturing process it need not to hold stock of raw materials. However in actual practice a time lag exists between demand of raw materials in manufacturing process as well as its supply. Provider of raw material to the firm mat as well is delayed because of such factors as transport problems, strike, short supply etc. Thus the firm must maintain adequate inventory of raw material to run its manufacturing process regularly. Likewise need to hold inventory of finished goods arises because the rate of manufacturing and the rate of sale don't match. A firm can't manufacture the goods immediately on demand by customers.
(2) Quantity Discounts: - Raw materials are necessary as and when production process is run. However instead of procuring raw materials in small quantities at the time of each production run firm may purchase large quantities of raw material in advance to acquire quantity discounts of bulk purchasing. This results in a important saving in costs.
(3) Expectancy of Price Rise: - Anticipation of price rise may as well necessitate purchasing and holding of raw material inventories.
(4) Reducing Ordering Cost: - These costs comprise the cost of preparing transporting cost, purchase orders, receiving costs, inspecting costs etc.
These cost raise in proportion to number of order placed. Thus a firm may purchase raw materials in excess of its immediate requirements by placing one bulk order to reduce the ordering costs. This as well results in accumulation of raw material inventory.