Final answer:
The goal of inventory planning for a company is to balance having enough stock to meet demand without incurring excessive costs due to overstocking. Optimal production scale and efficient inventory management help achieve economies of scale and set prices that cover costs and desired profits.
Step-by-step explanation:
When planning for inventory, a company's goal is to maintain a balanced approach, with enough stock on hand to meet demand, but not so much that it increases costs unnecessarily or risks obsolescence. Proper inventory management aims to minimize the cost of holding inventory while ensuring there are no sales lost due to insufficient stock levels. Having too much inventory can lead to increased costs such as storage and potential wastage, especially for perishable goods. Conversely, too little inventory might result in stockouts, lost sales, and potentially losing customers to competitors.
Companies strive to achieve economies of scale, whereas the quantity of output goes up, the cost per unit goes down. This means that a larger factory or warehouse can produce goods at a lower average cost than a smaller one. Proper planning for inventory factors in these economies of scale, also recognizes the market demand and seeks to align production and inventory levels accordingly. This alignment is crucial as the amount of inventories sitting on shelves tends to decline if the business is better than expected or to rise if the business is worse than expected.
The optimal scale of production and inventory planning is essential for setting prices that cover the cost of production and yield the desired profit, as showcased in warehouse stores like Costco or Walmart that leverage their scale to offer lower prices to consumers.