Inventory makes up a large part of the total assets in an organization and if it remains for a long period of time in the company’s warehouse it would impact the profits and cash flows negatively. This makes it all the more worthwhile to manage inventory effectively and efficiently. In order to achieve higher levels of profits and free cash flows companies need to manage inventory by lowering the time period goods remain in inventory. The prime objective of inventory management is to increase the inventory turnover rate in an organization and eliminate the time inventory sits idle in the warehouse.
The level of inventory in an organization should be at an optimum which means it should neither be too low nor too high. A very low level of inventory would mean that the company would not be able to meet the demand of consumers while a very high level of inventory would mean that inventory remains idle in the company warehouse using up the company’s cash resources. Some inventory management concepts like Just in Time Inventory and Zero Inventory apply the concept of keeping almost no goods in the inventory and purchasing or manufacturing goods as and when the need for delivery arises. This entails that the raw material or goods are purchased and manufactured only when an order has been made (Mercado).
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