Buffer stocks are kept to hedge against stock outs

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Buffer stocks are kept to hedge against stock outs, and are determined carefully. Decoupling of operations Inventories break operations apart, so that one operation’s demand is independent of another’s supply. In this way, local material shortages or maintenance downtime do not carry throughout stages. Leveling of production During slack periods, inventories are built up. During high-demand periods, inventories are depleted. This is done while the production rate is kept at a constant level. Ordering of economy Basically, there is a trade-off between numerous low- quantity orders that present a high reordering cost and a few large orders that present a high carrying cost. The optimum-size order is a result of this trade-off and generally calls for some inventory. Besides, larger orders may entitle the buyer to a volume discount. Control system economy A larger inventory facilitates less control effort. Fewer review actions to determine whether reordering is necessary are required if a larger inventory is kept. Frequent review action of this kind are costly. Reducing on investment Inventory should be carried so long as it compare favorably with other possible capital investments available to the organization. As inflation pushes purchasing costs and selling prices up, hoarding inventory presents a favorable investment. Reducing of material-handling charges moving of single completed units from one process to another is costly. Moving of batches of completed units is less expensive, and can be done by means of a fork-lift truck, an overhead crane, or a tray. The batches, however, constitute an inventory that involves carrying costs. 14.3.3 PURPOSE OF INVENTORIES Before discussing different issues related to inventory control, we should discuss: what is the purpose of holding stocks in the first place? Inventories serve the following purposes: To meet anticipated demand. These inventories are referred to as anticipation stocks because they are held to satisfy expected demand. Examples of this type of demand are stereo systems, tools, or clothing. To smooth production requirements. Firms that experience seasonal patterns in demand often build up inventories during off-season periods to meet overly high requirements during certain seasonal periods. These inventories are aptly named seasonal inventories. Companies that process fresh fruits and vegetables deal with seasonal inventories. So do stores that sell greeting cards, skis, snowmobiles, or Christmas trees. To decouple components of the production-distribution system. The inventory buffers permit other operations to continue temporarily while machine breakdowns are resolved. Similarly, buffers of raw materials are used to insulate production from disruptions in deliveries from suppliers. Finished good inventories
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187 are used to buffer sales operations from manufacturing disruptions. By recognizing the cost and space needed, companies start to realize the elimination of disruptions can greatly decrease the need for the inventory buffers decoupling operations.
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