4.2 Inventory costs
Inventories, therefore, are useful tools in the logistics chain, and there are good reasons for them being there. However, they must be carefully managed, because they also represent a significant cost. Keeping low inventories and risking a stock out can be very expensive, for example. A stock out occurs when there is a buyer for an item but the item is no longer available. Custom will be lost in these circumstances, perhaps never to be regained.
On the other hand, inventories, although usually shown as assets, are, nevertheless, money tied up in material which is sitting in stock, not being processed or having value added*, and not with the customer, earning payment. Maintaining inventories of increasingly processed stock is incrementally costly. The decision that a firm has to make is whether it is worthwhile locking up this capital in stock or investing the same money elsewhere to get better returns.
Previous Page