Inventory

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Vikram Parsani

Inventories are the raw materials, unfinished and finished goods held in stock by a company for future sale.

They constitute one of the most important assets for a company, because the turnover of inventory represents a primary source of revenue generation for the company and subsequent earnings for shareholders. Possessing a high amount of inventory for long periods of time is usually looked down upon because of the associated storage, obsolescence and spoilage costs. Similarly, possessing too little inventory is also looked down upon because of the potential loss of sales and market share.

In recent times, inventory management forecasts and strategies, like the just-in-time inventory system, have focused on increasing efficiency and minimizing costs associated with the storage and upkeep of inventories. This represents a shift away from the just-in-case inventory system where companies carried larger inventories so as to be able to meet higher demand.

Rationale

The rational for keeping stock of inventories is as follows.

• Time - There's a time lag from manufacturer to consumer at every stage of the supply chain. During this lag, companies need to ensure that they have enough inventory to fulfill the needs of their business.
• Uncertainty - Inventories are maintained as buffers to guard against uncertainties in demand, supply and movement of goods.
• Economies of Scale - The bulk production, movement and storage of goods brings about economies of scale. It also brings about the need to manage and maintain these goods.

Types

As mentioned above, there are three types of inventories.

• Raw Materials
• Unfinished Goods or Work in Process
• Finished Goods

Inventory Tracking Systems

• Perpetual Inventory System
• Periodic Inventory System

Inventory Valuation Techniques

• Last In, First Out (LIFO)
• First In, First Out (FIFO)
• Average Cost of Goods Sold Method
• Specific Identification Method