Inventories constitutes the most significant part of current assets of large majority of companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore absolutely imperative to manage inventories efficiently in order to avoid unnecessary investment. A firm nelegecting the management of inventories may fail ultimately. It is possible for a company to reduce its level of inventories to a considerable degree e.g. 10 to 20% without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in ‘Excessive’ inventories carries a favourable impact on a company’s profitability.
Nature of Inventories:- Management of inventory constitutes one of the major investments in current assets. The various forms in which a manufacturing concern may carry inventory are:
1) Raw Material: These represents inputs purchased and stored to be converted into finished products in future by making certain manufacturing process of the same.
2) Work in Process: These represent semi-manufactured products which need further processing before they can be treated as finished products.
3) Finished Goods: These represents the finished products ready for sale in market.
4) Stores and Supplies: These represents that part of inventory which does not become a part of final product but are required for production process. They may be in form of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc. Normally they form a very major part of total inventory and do not involve significant investment.