By the inventory management system the manufacturing company can be benefited in many ways. The basic function of inventories is to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued at exactly the same rate. The key activities are (1) purchasing, (2) production, and (3) selling. The term uncoupling means that these interrelated activities of a firm can be carried on independently. Without inventories, purchasing and production would be completely controlled by the sales schedules. If the sale of a firm increases, these two would also increase and vice versa. In other words, purchasing and production functions would depend upon the level of sales. It is, of course, true that in the long run, the purchasing and production activities are and, in fact, should be tied to the sales activities of a firm. But, if in the short term they are rigidly related, the three key activities cannot be carried out efficiently. Inventories permit short-term relaxation so that each activity may be pursued efficiently. Stated differently, inventories enable firms in the short run to produce at a rate greater than purchase of raw materials and vice versa, or to sell at a rate greater than production and vice versa.

Since inventory enables uncoupling of the activities of a firm, each of them can be operated at the most efficient rate. This has several beneficial effects on the firm’s operations. In other words, three types of inventory, raw material, work-in-process and finished goods, perform certain useful functions. Alternatively, rigid tying (coupling) of purchase and production to sales schedules is undesirable in the short run, as it will deprive the firms of certain benefits. The effects of uncoupling (maintaining inventory) are as follows:

1. Benefits in Purchasing:  if the purchasing of raw materials and other goods is not tied to production / sale, that is, a firm can purchase independently to ensure the most efficient purchase, several advantages would become available. In the first place, a firm can purchase larger quantities than is warranted by usage in production or the sales level. This will enable it to avail of discounts that are available on bulk purchases. Moreover, it will lower the ordering cost, as fewer acquisitions would be made. There will, thus, be a significant saving in the costs. Second, firms can purchase goods before anticipated or announced price increases. This will lead to a decline in the cost of production. Inventory, thus, serves as a hedge price increases as well as shortages of raw materials; this is a highly desirable inventory strategy.

2. Benefits in Production: Finished goods inventory serves to uncouple production and sale. This enables production at a rate different form that of sales. That is, production can be carried on at a rate higher or lower than the sales rate. This would be of special advantage to firms with seasonal sales pattern. In their case, the sales rate will be higher than the production rate during a part of the year and lower during the off-season. The choice before the firm is either to produce at a level to meet the actual demand, that is, higher production during peak season and lower production during off-season, or, produce continuously throughout the year and build up inventory, which will be sold during the period of seasonal demand. The former involves discontinuity in the production schedule while the latter ensures level production. The level production is more economical as it allows the firm to reduce the cost of discontinuities in the production process. This is possible because excess production is kept as inventory to meet future demand.

3. Benefits in Work-in-Process: The inventory of work-in-process performs two functions. In the first place, it is necessary because production processes are not instantaneous. The amount of such inventory depends upon technology and the efficiency of production. The larger the steps involved in the production process, the larger the work-in-process inventory and vice versa. By shortening the production time, efficiency of the production process can be improved and the size of this type of inventory reduced. In a multi-stage production process, the work-in-process inventory serves a second purpose also. It uncouples the various stages of production so that all of them do not have to be performed at the same rate. The stages involving higher set-up costs may be most efficiently performed in batches with a work-in-process inventory accumulated during a production run. 

4. Benefits in Sales: The maintenance of inventory also helps a firm to enhance its sales efforts. For one thing, if there are no inventories of finished goods, the level of sales will depend upon the level of current production. A firm will not be able to meet demand instantaneously. There will be a lag depending upon the production. If the firm has inventory, actual sales will not have to depend on lengthy manufacturing process. Thus, inventory serves to bridge the gap between current production and actual sales. A related aspect is that inventory serves as a competitive marketing tool to meet customer demands. A basic requirement in a firm’s competitive position is its ability vis-à-vis its competitors to supply goods rapidly. If it is not able to do so, the customers are likely to switch to suppliers who can supply goods at short notice. Inventory, thus, ensures a continued patronage of customers. Moreover, in the case of firms having a seasonal pattern of sales, there should be a substantial finished goods inventory prior to the peak sales season. Failure to do so may mean loss of sales during the peak season.

To summarize the preceding discussion relating to the objective of inventory management, the two main aspects pertain to the minimization of investment in inventory, on the one hand, and the need to ensure that there is enough inventory to meet demand such that production and sales operations are smooth. They are often in conflict with each other. By holding fewer inventories, cost can be minimized, but they’re us a risk that the operations will be disturbed as the emerging demands cannot be met. On the other hand, by holding a large inventory, the chances of disruption of operations are reduced, but the cost will increase. The appropriate level of inventory should be determined in terms of a trade-off between the benefits and costs associated with maintaining inventory.