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Encyclopedia of Business, 2nd ed.
Reference for Business » Encyclopedia of Business, 2nd ed. » Int-Loc » Inventory Management
INVENTORY MANAGEMENT
Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory.There are several schools of thought that view inventory and its function differently. These will be addressed later, but first we present a foundation to facilitate the reader's understanding of inventory and its function.
WHAT IS INVENTORY?
Inventory is a quantity or store of goods that is held for some purpose or use (the term may also be used as a verb, meaning to take inventory or to countall goods held in inventory). Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at thecurrent time (e.g., within the next few hours).
WHY KEEP INVENTORY?
Why would a firm hold more inventory than is currently necessary to ensure the firm's operation? The following is a list of reasons for maintaining what would appear to be "excess" inventory.

Table 1
| January | February | March | April | May | June |
Demand | 50 | 50 | 0 | 100 | 200 | 200 |
Produce | 100| 100 | 100 | 100 | 100 | 100 |
Month-end inventory | 50 | 100 | 200 | 200 | 100 | 0 |
MEET DEMAND.
In order for a retailer to stay in business, it must have the products that the customer wants on hand when the customer wants them. If not, the retailer will have to back-order the product. If the customer can get the good from some other source, he or she may choose to do sorather than electing to allow the original retailer to meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost forever.
KEEP OPERATIONS RUNNING.
A manufacturer must have certain purchased items (raw materials, components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer fromcompleting the production of its finished goods.
Inventory between successive dependent operations also serves to decouple the dependency of the operations. A machine or workcenter is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a workcenter, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory iskept between each workcenter, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.
LEAD TIME.
Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered.
If a supplier (an external firm or aninternal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory.
A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats asmany as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months' steel requirements would be necessary.
HEDGE.
Inventory can also be used as a...