Fundamentals of Financial Management, Third Edition

SUMMARY

Maintaining inventory is beneficial as it meets the transaction, precautionary and speculative needs of the operation. But it also involves costs in the form of cost of material, order cost, carrying cost, financing cost and stock-out cost.

The goal of inventory management is to make the best use of inventory through its classification on the basis of its importance. Greater care is taken of more important items. The firm has to determine an economic order quantity through a trade-off between the carrying cost and the order cost so that the total cost is minimised. When suppliers offer quantity discounts, a firm may raise the size of its order over and above the EOQ if the benefits of discount reduce the total cost below the level warranted ...