Inventory is a vital part of trading and manufacturing companies. That is why, it is necessary to have accurate information about stock level. If the entity is not keeping up-to-date information about its inventories of raw materials, work in process and finished goods, then there are major chances that it will not be able to manage its operations effectively and will sooner moving towards its closure.
Inventory management is considered as the bad management and this can only be improved by implementation of different tools and techniques such as calculating the Economic Order Quantity (EOQ), Safety Stock and Reorder level.
The management of inventory or stock is necessary because by maintaining an effective inventory management system enables management in saving a high amount at the end of the year. If the entity is producing unnecessary stock without knowing how much it has already into the finished goods store, then new stock/ inventory will have no place to be stocked. As a result, a new place will be rented out or bought which will cost extra amount and will cause minimization of profit or increase in the losses already the entity is incurring.
Another aspect might be that the entity is not aware of its raw material stock level. Under this case, whenever it receives new orders from customers, it would not be able to meet the customer’s deadlines because it has insufficient stock/ inventory level in the store room.