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What Are the Core Objectives of Inventory Management and Why Is Cost Reduction a Key Goal?
Discover the primary objectives of inventory management, including reducing holding costs, ensuring uninterrupted production, and avoiding stockouts. Understand why maximizing advertising spend is not a goal of inventory management and how focusing on core objectives improves profitability and operational efficiency.
Question
Which of these is NOT an objective of inventory management?
A. Maximizing advertising spend
B. Reducing excess holding costs
C. Ensuring uninterrupted production
D. Avoiding stockouts
Answer
A. Maximizing advertising spend
Explanation
Advertising is unrelated to inventory management objectives. This is not an objective of inventory management, as advertising is a function of the marketing department, focused on driving demand, while inventory management is concerned with efficiently managing the supply of goods to meet that demand.
Core Objectives of Inventory Management
The primary goals of inventory management revolve around balancing the costs of holding inventory with the need to meet customer and production demands. This involves several key objectives:
B. Reducing excess holding costs: A fundamental goal is to minimize the costs associated with storing inventory. Excess inventory leads to significant carrying costs, which include expenses for storage space, insurance, labor, taxes, and capital tied up in unsold goods. These costs can erode profitability, with studies showing that excess inventory can diminish its own value by 25% to 32% annually.
C. Ensuring uninterrupted production: Inventory acts as a buffer to keep production lines running smoothly. By holding raw materials and work-in-process items (known as decoupling inventory), a company can isolate different stages of production. This ensures that a delay in one area, such as a late supplier delivery or equipment malfunction, does not halt the entire manufacturing process.
D. Avoiding stockouts: Preventing stockouts is a critical objective to maintain customer satisfaction and protect revenue. A stockout occurs when a product is unavailable for purchase, leading directly to lost sales as customers may buy from a competitor or forgo the purchase entirely. Beyond the immediate financial loss, frequent stockouts can damage a company’s reputation and weaken customer loyalty.
Inventory Management: Analyze, Optimize & Control certification exam assessment practice question and answer (Q&A) dump including multiple choice questions (MCQ) and objective type questions, with detail explanation and reference available free, helpful to pass the Inventory Management: Analyze, Optimize & Control exam and earn Inventory Management: Analyze, Optimize & Control certificate.