Inventory
From GAWDAwiki
Inventory is any quantifiable item that can be handled, bought, sold, stored, consumed, produced or tracked. This covers everything from office and maintenance supplies to raw material used for manufacturing to semi-finished and finished goods to fuel used to power equipment used in the business.[1]
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Purpose of Inventory
There are a number of reasons for maintaining what would appear to be "excess" inventory.
Meet Demand
It is important for a retailer to have products in supply when the customer wants them. If the retailer does not have a product in stock, it must be back-ordered. Rather than wait, the customer is likely to order the product from another supplier. If a good is not in inventory, a sale can be lost forever.
Keep Operations Running
A manufacturer must have certain purchased items (raw materials, components or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods.
Lead Time
Lead time is the time that elapses between the placement of an order (either a purchase order or a production order issued to the shop or the factory floor) and the receipt of the goods.
If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory.
Hedge
Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
Quantity Discount
Often, firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.
Smoothing Requirements
Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic.[2]
