The major factors determining inventory levels include:
(a) firm’s policy regarding the level of customer service to be offered. Higher the level of service greater will be the need to keep more inventories;
(b) degree of accuracy of the sales forecasts. In case more accurate estimates are available, the need for keeping very high level of inventory can be minimised;
(c) responsiveness of the distribution system i.e., ability of the system to transmit inventory needs back to the factory and get products in the market. In case the time required to respond to the additional demand for the products is high there is a need to maintain higher inventory. But if the additional demand can be met in less time, the need for inventory will also be low; and
(d) cost of inventory, which includes holding cost such as cost of warehousing, tied up capital, etc and the manufacturing cost. |
