Inventory

Definition

Inventory refers to the goods and materials that a business holds for the purpose of resale or production. It encompasses various forms, such as raw materials, work-in-progress items, and finished products, playing a crucial role in managing supply chains and meeting customer demand effectively.

5 Must Know Facts For Your Next Test

1. Inventory can be categorized into three main types: raw materials, work-in-progress, and finished goods, each serving a specific function in the production process.
2. Effective inventory management helps businesses optimize their operations, reduce costs, and improve customer satisfaction by ensuring product availability.
3. Carrying excess inventory can lead to increased holding costs, including storage fees, insurance, and potential obsolescence of products.
4. Technology plays a significant role in inventory management, with systems like barcode scanning and RFID helping businesses track their inventory levels in real-time.
5. The value of inventory is recorded on the balance sheet as a current asset, making it an essential component of a company’s financial health.

Review Questions

• How does effective inventory management impact overall business operations?
  • Effective inventory management is critical for maintaining the balance between supply and demand. It helps businesses reduce costs associated with excess stock while ensuring that products are available when customers need them. This balance can lead to improved customer satisfaction and streamlined operations, allowing companies to respond quickly to market changes without incurring significant financial risk.
• Discuss the advantages and disadvantages of using a just-in-time (JIT) inventory system.
  • A just-in-time (JIT) inventory system offers several advantages, including reduced holding costs and minimized waste, as it encourages businesses to order only what they need for production. However, it also presents disadvantages such as vulnerability to supply chain disruptions. If suppliers fail to deliver on time or unexpected demand spikes occur, businesses may face stockouts, which can negatively impact sales and customer satisfaction.
• Evaluate the importance of technology in modern inventory management practices and its effect on business efficiency.
  • Technology plays a pivotal role in modern inventory management by providing tools that enhance accuracy and efficiency. With advancements like automated tracking systems using barcodes or RFID technology, businesses can maintain real-time visibility into their stock levels. This allows for better decision-making regarding ordering and stocking practices. By leveraging these technologies, companies can reduce errors, optimize inventory turnover rates, and ultimately improve their operational efficiency.

Related terms

stock keeping unit (SKU): A unique identifier for each distinct product and service that can be purchased, allowing for efficient inventory management.

just-in-time (JIT): An inventory management strategy that aligns raw-material orders with production schedules to reduce waste and minimize holding costs.

safety stock: Extra inventory held to prevent stockouts caused by variability in supply and demand, acting as a buffer in the inventory system.