items, held at stocking points, and serving to decouple successive operations in a manufacturing or distribution process (Peters, 1986). Inventories are also defined in an accounting context, as "the aggregate of those items of personal property which are: (1) held for sale in the ordinary course of business; (2) in the process of production for later sale; or (3) held for current consumption in the production of goods and services . . . for sale" (Meigs and Meigs, 1988, p. 120).
In real world situations, inventories may be comprised of tangible goods, such as aircraft component parts, or of intangible services, such as airline tickets. What is significant, in this context, is that the goods and services be owned by the entity possessing the inventories.
Materials management and control is an important managerial function. There are many factors providing significance to the materials management and control function. Among the more significant of these factors are the following:
1. It costs money to maintain inventories. This fact is a seemingly simple and obvious one; however, it is one which is often overlooked. If a firm's cost of capital is 15 percent, the annual capital cost of carrying an inventory valued at $100,000 is $15,000, while it could cost $150,000 in interest charges per annum to carry an inventory valued at $1,000,000. Additionally, it costs money to store, handle, and maintain an inventory. In this context, it is desirable to maintain inventories at the lowest feasible levels.
2. It costs money to maintain inadequate inventories. If a firm is "out" of an item desired by a customer at the time the item is desired by the customer, the firm may well lose a sale. In this context, an inadequate inventory results in an opportunity cost to a firm. Thus, in this context, it is desirable to maintain inventories at levels sufficient to support demand.
3. Inventories are subject to obsolesence...