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What is the Purpose of Inventory? (2024 Update)

3 minutes

In this article, we will explain exactly what the purpose of inventory is and why it is important. Read on to learn more.

purpose of inventory

What is the Purpose of Inventory?

Inventory ensures products are on hand to meet customer demand. By managing inventory effectively, companies aim to maximize sales and profits.

Example: A shoe store keeps 100 pairs of "AirWalk" sneakers in stock. When a sudden demand surge occurs, they sell 80 pairs over the weekend. Because of their inventory, they capture sales worth $8,000 (assuming each pair sells for $100) without missing out on potential customers.

inventory purpose

10 Reasons why Inventory is Important

1. Meet Demand

Inventory ensures products are available for customers when they want to buy. This avoids lost sales from stock-outs. Businesses can thus maintain steady revenue streams.

Example: A bookstore stocks 200 copies of "Bestseller X." Over a week, they sell 180 copies. Their inventory ensured continuous sales worth $3,600, assuming each book costs $20.

2. Buffer Against Uncertainty

Inventory acts as a safety net for unpredictable market changes. It helps businesses address sudden spikes in demand or supply delays. This prevents potential disruptions.

Example: A toy store keeps 50 "RoboToys" on hand. A surprise trend makes the toy popular, and they sell all in a day. Their foresight generated $2,500, with each toy priced at $50.

3. Achieve Economies of Scale

Bulk purchasing often leads to cost savings. Holding inventory lets companies order in large quantities. This reduces per-unit costs.

Example: A cafe buys coffee beans in 100-pound bags instead of 10-pound ones. By doing so, they save $5 per pound. This results in a $500 saving on a 100-pound purchase.

4. Smooth Production

Inventory allows steady production rates. It separates production from sales rates. Manufacturers can thus optimize resource usage.

Example: A car factory produces 100 cars every day. Despite selling only 70 cars daily, they maintain production levels. This ensures they meet higher demand during weekends or holidays.

5. Bridge Geographical Gaps

Goods are often produced in one place and sold in another. Inventory bridges this geographical distance. It ensures timely product availability regardless of location.

Example: A tech company manufactures phones in China but sells them in the US. They keep a stock of 10,000 units in the US warehouse to meet immediate demands.

6. Improve Service Levels

Having products on hand leads to faster delivery. Inventory ensures prompt customer service. This builds customer loyalty.

Example: An online retailer promises two-day delivery. They hold popular items in local warehouses. As a result, they successfully deliver a laptop to a customer within the promised time frame.

7. Reduce Ordering Costs

Ordering frequently has associated costs. Inventory reduces the need for frequent orders. This saves administrative and shipping costs.

Example: A restaurant orders vegetables once a week instead of daily. By doing so, they save on four delivery charges each month.

8. Prevent Stockouts

Running out of stock means lost sales. Inventory prevents this undesirable scenario. It ensures continuous business operations.

Example: A pharmacy keeps 100 units of a popular medicine. When a health crisis emerges, they can serve the immediate needs without waiting for new stock.

9. Hedge Against Price Changes

Prices of goods can fluctuate. Inventory allows businesses to buy at lower prices and sell later. This can lead to increased profit margins.

Example: A jeweler buys gold when prices are low. When prices soar after two months, they sell their inventory, making a higher profit on each piece.

10. Allow for Lead Time

The time between ordering and receiving goods is the lead time. Inventory ensures businesses can operate during this period. It prevents potential sales loss due to waiting.

Example: An electronics store orders TVs from abroad with a lead time of 30 days. They keep a month's worth of stock to ensure sales aren't affected during the waiting period.

We hope that you now have a better understanding of what the purpose of inventory is and how you can use it in your business.

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