
Inventories, which can include raw materials, work in process, and finished goods are an essential
part of virtually all business operations
(because the turnover of inventory represents one of the primary sources of revenue generation and
subsequent earnings for the company's shareholders.)
 Types of inventory
 Raw materials inventory
Store of items used in the production process
May qualify for quantity discounts
Assure supply in times of scarcity
 Work-in-process inventory
Items at some intermediate stage of completion
Size related to length and complexity of production cycle
 Finished goods inventory
Items at some intermediate stage of completion
Size related to length and complexity of production cycle
 Inventory is costly to manage and hold, as it consumes time and requires funding, exactly like a
new machine or building
(Explain: Optimal inventory levels depend on sales, so sales must be forecasted before target inventories
can be established. Moreover, because errors in setting inventory levels lead to lost sales or excessive
carrying costs, inventory management is quite important. Therefore, firms use sophisticated computer
systems to monitor their inventory holdings.)
 The inventory management problem is to find the lowest level of inventory consistent with
maximizing profits
Definition of Inventory Management
Inventory management refers to the process of ordering, storing and using a company's inventory.
(This enables you to succeed in having the right number of units in the right place, at the right time and
for the right price. When effectively tracking and controlling your physical inventory, you’ll know how
many of each item you have, when you might be running low on products and whether you should
replenish that item in order to keep selling it.)
Costs of an inventory policy
3 main categories
 Ordering costs: Cost of placing and receiving an order of goods
 Carrying costs: Cost of holding inventory
Expressed as cost per unit per period
A percent of the inventory value per period
 Stock-out costs: Incurred when a firm is unable to fill an order, resulting in:
Lost sales
Rescheduling production
Expediting special orders