A company has various motives for holding the inventory as stated below:
1) Transaction Motive : The Company may be required to hold the inventory in order to facilitate the smooth and uninterrupted production and sale operations. It may not be possible for the company to procure the raw material whenever necessary. There may be a time lag between the demand for the material and its supply. Hence it is needed to hold the raw material inventory. Similarly it may not be possible to produce the goods immediately after they are demanded by the customers. Hence it is needed to hold the finished goods inventory. They need to hold work in progress may arise due to production cycle.
2) Precaution Motive : In addition to the requirement to hold the inventory for routine transactions, the company may like hold them to guard against risk of unpredictable changes in demand and supply forces. Eg. The supply of raw material may get delayed due to factors like strike, transport, disruption, short supply, lengthy processes involved in import of raw material etc. hence the company should maintain sufficient level of inventory to take care of such situations. Similarly, the demand for finished goods may suddenly increases (especially in case of seasonal type of products) and if the company is unable to supply them, it may mean gain of competition. Hence, company will like to maintain sufficient supply of finished goods.
3) Speculative Motive: The Company may like to purchase and stock the inventory in the quantity which is more than needed for production and sales purpose. This may be with the intention to get advantage in term of quantity discounts connected with bulk purchasing or anticipating price rise.
