Question

What is inventory?

Answer 1

stuff you can keep things in

Answer 2

Inventory is the goods and materials a business holds for the purpose of resale, production, or maintenance. It’s a key asset on the balance sheet and a central element of operations and supply-chain management.

Short definition
- Inventory = stock of items a company keeps to meet demand, support production, or maintain operations.

Main types
- Raw materials: inputs used in production.
- Work in progress (WIP): partially finished goods still in production.
- Finished goods: completed products ready for sale.
- MRO (maintenance, repair, and operations): supplies used to keep operations running (tools, lubricants, office supplies).

Why businesses hold inventory
- Decouple production from demand (buffer stock).
- Smooth production and absorb supply variability.
- Meet customer service goals and avoid stockouts.
- Take advantage of bulk-purchase discounts or seasonal demand.
- Hedge against price increases or supply disruptions.

Costs associated with inventory
- Holding (carrying) costs: storage, insurance, obsolescence, capital cost.
- Ordering costs: procurement, shipping, receiving.
- Shortage costs: lost sales, expedited shipping, customer dissatisfaction.
- Spoilage/obsolescence costs.

Accounting and valuation methods
- FIFO (first-in, first-out): assume oldest items sold first.
- LIFO (last-in, first-out): assume newest items sold first (not permitted under IFRS).
- Weighted average cost: average cost per unit.
- Specific identification: track actual cost per item (used for unique/high-value items).

Common management methods and metrics
- Economic Order Quantity (EOQ): formula to balance ordering and holding costs.
- Safety stock: extra inventory to protect against variability.
- Just-in-Time (JIT): minimize inventory by receiving goods only as needed.
- ABC analysis: prioritize items by value and/or usage (A = high value, C = low value).
- Cycle counting: periodic inventory checks instead of full physical counts.
- Inventory turnover = Cost of goods sold / average inventory.
- Days of inventory (days sales of inventory) = 365 / inventory turnover.

Example
- A clothing retailer holds finished goods to sell to customers, keeps extra stock before the holiday season (anticipation), and stores basic store supplies as MRO inventory.

Bottom line
Inventory is both an asset and a cost — managing it well balances customer service and production needs against the costs of holding and running out of stock.