Purpose, Cost and Benefits of Inventory

Purpose of Inventory

Inventory is a crucial asset for any business that deals with tangible goods, helping it maintain a steady flow of goods in the market.
Inventory serves as a buffer between the processes of production and sales, ensuring that the business operates smoothly even when there are unexpected changes in demand or supply.
Elements such as raw materials, work-in-progress and finished goods all fall under inventory and do essential service in the production process.
Inventory also plays a role in smoothing seasonal demand fluctuations. This helps the business maintain a steady production rhythm without resorting to starting and stopping production according to market variations.

Businesses incur carrying costs while holding inventory which includes the costs of storage, insurance, depreciation and obsolescence.
Reordering costs are those associated with replenishment of stock. This includes costs involved in ordering and transporting materials and indirect costs like inspection, receiving, and set-up costs.
Businesses run the risk of stock-out costs when they run out of inventory. These are missed sales opportunities, and the potential loss of customer goodwill.
If businesses hold too much inventory, overstocking costs can ensue which take the form of high carrying costs, but also the wasted cost of obsolete or out-dated stock.

Having an ample amount of inventory allows businesses to cope with unexpected demand surges, ensuring that they do not miss out on potential sales.
Inventory helps in maintaining production continuity by having sufficient raw materials and components available for production process.
Adequate inventory allows businesses to achieve economies of scale in purchasing and production, which in turn lowers costs.
With a well-managed inventory, businesses can offer faster delivery times to customers, thus improving their customer service reputation and potential market position.