Inventories Companies hold inventories in the form of raw materials

Ø Inventories Companies hold inventories in the form of raw materials, work-inprocess
and finished goods. Inventories represent investment of a firm’s funds.
The objective of the inventory management should be the maximisation of the
value of the firm. The firm should therefore consider: (a) costs, (b) return, and (c)
risk factors in establishing its inventory policy.
Ø Transaction Motive to Hold Inventory for facilitating smooth production
and sales operation.
Ø Precautionary Motive to Hold Inventory to guard against the risk of
unpredictable changes–in usage rate and delivery time.
Ø Speculative Motive to Hold Inventory to take advantage of price
fluctuations.
Ø Ordering Costs requisition, placing of order, transportation, receiving,
inspecting and storing and clerical and staff services. Ordering costs are fixed
per order. Therefore, they decline as the order size increases.
Ø Carrying Costs warehousing, handling, clerical and staff services, insurance
and taxes. Carrying costs vary with inventory holding. As order size increases,
average inventory holding increases and therefore, the carrying costs increase.