Why inventory management is important to a production company Term Paper

Why inventory management is important to a production company - Term Paper Example to enhance overall internal organizational efficiency, and dictates the degree to which raw materials are ordered as part of the supply chain strategy. Managing inventories involves maintaining an understanding of the exact quantity of finished product which is currently sitting idle in company inventories. Some companies produce larger volumes of finished product based on forecasts or customer demand, allowing their finished goods inventories to remain well-stocked in order to maintain a prepared business stance. Others prefer a more lean production schedule, avoiding issues of high taxation due to large inventory volumes and as a means to reduce the costs of securing raw supply chain products. Whatever methodology of production deemed necessary to meet customer demand, it is highly crucial to manage inventory volumes from a manufacturing forecast perspective. If the organization maintains a wide variety of external customers, each with a differing supply schedule, coordinating manufacturing activities to satisfy this demand becomes increasingly difficult. Thus, there are generally capacity issues on the production floor, stemming from the tangible ability to produce high volumes of product in a fast turn-around production floor. For instance, consider a company which produces zippers for a wide variety of clothing companies. This company’s largest customer orders thousands of zippers each month, thus the production facility will produce a high volume of product in several batch runs, eventually storing them in finished goods inventory to await final delivery to the customer. However, this customer suddenly reduces its forecasted totals and radically reduces its zip per orders for the next three months consecutively. It is at this point that the company must have a clear understanding of what currently exists in its inventories to avoid the labor costs associated with over-production. When planning production schedules, the responsible individuals can view a