Inventory is material that the firm obtains in advance of need, holds until it is needed, and then uses, consumes, incorporates into a product, sells, or otherwise disposes of. A business inventory is by its nature temporary; that is, the firm expects to hold an individual item as inventory for a relatively brief period of time. However, due to the ongoing nature of the firm's operation, aggregate or total inventory is continually being reordered and restocked. The net effect of these ongoing processes of usage and replenishment is that the firm retains a "permanent investment" in inventory. In other words, individual units come and go, but the firm generally maintains some amount or level of total or aggregate inventory. These inventory assets can be as important to the financial structure of the firm as is investment in, for example, plant and equipment.
Inventory management and control consists of developing good answers to the following questions:
A. Which items will the firm carry as inventory?
B. Where in the logistics system will these inventories be maintained?
C. How large will the inventory for each item be?
Inventory by its nature is dynamic over time. For a typical item with a long product lifetime, inventory stocks rise with replenishment actions and fall with usage or consumption. Decisions about the size of the inventory are therefore implemented over time by monitoring and adjusting the sizing and the timing of inventory replenishment quantities to bring about the desired average or aggregate inventory size. The larger issue here is to determine what an appropriate or correct inventory posture might be for the firm. To answer this question, the analysis must carefully consider:
A. The benefit provided by the inventory. That is, what purpose does the inventory serve, and what is the value of that service?
B. The total cost of the inventory. Many of these costs are obvious, but some others are not. An understanding of the true costs associated with inventory is essential.
C. Other logistics options that could be used in place of inventory. For example, it may be possible to replace an investment in inventory with premium or high speed freight service.A key insight to consider here is that inventory is can often be viewed as a cost-reduction tool. The real purpose of inventory is to reduce the total costs involved in the operation of the logistics system. There is usually a way to reduce the level of inventory in a system, but sometimes these alternatives are simply too costly. This is another way of saying that sometimes holding inventory is the cheapest and best way to solve a logistics problem.