Determining the amount of inventory

The level of sales, the length of the production cycle, and the durability of the product are major determinants of investment in inventory. In domestic or one-country operations, companies attempt to balance their inventory level in such a way that both carrying costs and stockout costs are minimized. However, differentials in the costs of production and storage in different countries allow the MNC to maintain more flexible inventory policies. For instance, an MNC can take advantage of lower costs in a particular country by shifting its production or storage function to that country. These advantages are offset by such disadvantages as tariff levels and other forms of import restrictions used by governments.

Given the fact that many foreign affiliates operate under inflationary conditions, an MNC must determine whether to buy inventory in advance or to delay purchase until the inventory is actually needed. Advance purchases involve such carrying costs as interest on funds tied up in inventory, insurance premiums, storage costs, and taxes. Later purchases increase the possibility of higher costs either through inflation or devaluation. Inflation increases the costs of locally purchased items, and devaluation increases the costs of imported items.

Despite the desire for optimizing inventory levels, many companies that rely on imported inventories maintain overstocked inventory accounts. The fears of continued inflation, raw materials shortages, and other environmental constraints induce companies to maintain high overseas inventory levels rather than risk curtailment of their overseas operations. Additional environmental constraints include anticipated import bans in foreign countries, anticipated delivery delays caused by dock strikes and slowdowns, the lack of sophisticated production and inventory control systems, and increased difficulty in obtaining foreign exchange for inventory purchases.

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