The relative importance of inventories differs among the various industries. They are relatively unimportant for the public utilities and service trades in which they total only 2 and 4 percent respectively of total assets. About one-third of the assets of retail establishments consists of inventories as docs 21 percent of the capital of manufacturing corporations. For both these industries inventory is the largest current asset and, for retailers, it is the largest asset of any type. In the wholesale and retail trades inventories consist almost entirely of finished goods whereas manufacturers must carry raw materials, goods in process, and supplies in addition to their finished products. Because manufacturing illustrates more of die ramifications of inventory management this industry will be used for illustrative purposes. For manufacturers as a whole finished goods constitute about 40 percent of total inventories but this ranges from one-third for durable-goods processors to slightly less than half for manufacturers of non-durable goods. On the other hand, work in progress is the most important segment of inventory for durable-goods manufacturers; it is relatively unimportant in the manufacturing of non-durable goods. As with the carrying of cash and receivables, the size of inventories is partly a function of the type of industry although a considerable range of management discretion is applicable.
If acquisition of materials, production, sale, and delivery were instantaneous there would be little reason for inventories. But acquisition of raw materials is time-consuming, the source of supply may be seasonal, and deliveries are not always certain. Moreover, purchases must be made in economical quantities and these do not bear any necessary relationship to the rapidity of their use. Breakdowns can occur in the productive process, and this contingency increases the amount of work in progress that must be maintained. Production runs cannot all be synchronized either with the size of economical purchases or with the volume and timing of sales. Production costs may dictate either regular production throughout the year, even though sales are seasonal, or a concentration within a short interval even though sales is stable. The situation is complicated further because inventory carrying costs tend to rise in proportion to advances in inventor)’ level whereas increasing the size of production runs affords a cost advantage that decreases in rate per unit of output as fixed costs are spread over more units.
Inventory Risks Investment in any type of asset involves some risk; inventories are the least liquid and the most risky of the current assets. Risks of price change are the greatest in the raw materials because of the volatility of their prices. Metals, crude rubber, wool, and various agricultural products are subject to sharp and wide swings in marketability. Goods in process of manufacture are especially illiquid; they must be completed to be salable. At the retail level, prices are generally more stable and yet obsolescence can be sudden and rapid as public tastes change. Not only may funds be tied up in slow-moving inventories but special efforts are required to sell them, especially in those consumer goods that are subject to annual change in type of model.
This article has been compiled by Classof1; they offer Finance Homework Help.
For assistance with your academic assignments, you can visit classof1.com
Related Articles – Inventory, Management,
Email this Article to a Friend!
Receive Articles like this one direct to your email box!
Subscribe for free today!