(a) Formulation of an inventory policy requires an understanding of the role of inventory in an organization. Firms hold inventories of meeting customers demand and other objectives but also too much inventory could affect a firm's operation efficiency . In view of this statement discuss 3 arguments for and 3 against holding inventories . (12 marks)

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(a) Formulation of an inventory policy requires an understanding of the role of inventory in an organization. Firms hold inventories of meeting customers demand and other objectives but also too much inventory could affect a firm's operation efficiency . In view of this statement discuss 3 arguments for and 3 against holding inventories . (12 marks)

Answer 1

**Arguments For Holding Inventories:**1. **Meeting Customer Demand:** Holding inventories ensures that firms can meet customer demand promptly, preventing stockouts and potential loss of sales.2. **Operational Efficiency:** Adequate inventory levels help maintain smooth production and operational efficiency by ensuring raw materials and components are available when needed.3. **Risk Management:** Inventories act as a buffer against supply chain disruptions, allowing firms to continue operations even when there are delays or shortages in supply.**Arguments Against Holding Inventories:**1. **High Storage Costs:** Excessive inventory incurs significant storage costs, including warehousing, insurance, and maintenance expenses.2. **Capital Tie-Up:** Large inventories tie up capital that could be used for other investments or business opportunities.3. **Risk of Obsolescence:** Holding too much inventory can lead to obsolescence, especially in fast-changing markets, resulting in write-offs and financial losses.**Correct Answer:** The arguments for and against holding inventories highlight the complex balance firms must manage to optimize their inventory levels effectively.

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