Read this section, which will help you understand how companies keep and manage inventory. There are basic reasons for keeping inventory on hand. The important part is that these reasons are evaluated for the needs of each organization and an inventory management system is created that allows for the highest level of efficiency possible.
Inventory represents finished and unfinished goods that have not yet been sold by a company.
Explain why and how companies keep inventory
In many cases (such as retail), a business must have its product on hand in order to complete a sale. For these companies, the reason for keeping one of each item on hand (in inventory) is that it enables them to make sales and capture revenue. However, many businesses keep more than one of every item on hand and also keep raw materials and unfinished goods on stock in factories. Why do they do this?
There are three basic reasons for keeping an inventory:
Inventory management is primarily about specifying the location and amount of stocked goods. Optimizing inventory management requires balancing many factors, including:
Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs to react to the wider environment. Optimal inventory levels are those that maximize profit from sales, while minimizing cost from storage, shipping, and working capital deployment.
While accountants often discuss inventory in terms of goods for sale, other organizations (such as manufacturers, service-providers and not-for-profits) also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers’, distributors’, and wholesalers’ inventory tends to cluster in warehouses. Retailers’ inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks, and therefore impossible to control them.
While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their “goods for sale” inventory into:
Inventory: Inventory in a warehouse
Source: Lumen Learning, https://courses.lumenlearning.com/boundless-business/chapter/logistics/
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