When you go to the store, it is common to pur-
chase things like paper products and beverages
in large quantities. In this way, you can store
these products for future needs and not have to
run back out to the store. After all, when you
want a “cold one” (soft drink, that is), you don’t
want to always jump into the car. These at home
shelf items can be thought of as your inventory.
Just as inventory offers you convenience, a
business also uses inventory to support its busi-
ness needs. From a consumer’s perspective, in-
ventory allows us to compare products, touch
products, purchase on impulse, and take im-
mediate delivery of a product upon purchase.
For example, Best Buyhas an inventory of TVs
available for viewing prior to purchase. In other
cases, consumers are willing to wait for the
product to be produced to their unique specifi-
cations.Boeing, for example, builds aircraft
only after an order is received.
The inventory held by a retailer must fit the
target consumer audience. For example, Best
Buy holds inventories of computer games, DVD
movies, CD music, and computer software in
order to create repeat consumer traffic. As a re-
sult, when a consumer wishes to purchase more
expensive consumer electronic hardware, he or
she will naturally consider Best Buy due to past
familiarity. However, Best Buy does not carry
lawn mowers because they do not fit its mer-
chandising emphasis.
Beyond customer benefits, inventory pro-
vides protection against disruptions in produc-
tion, transportation, or other processes. For
example, an unexpected strike by a supplier’s
employees can halt production for a manufac-
turer or cause lost sales for a merchandiser.
Inventory also allows a business to meet unex-
pected increases in the demand for its product.
For example, Best Buy carries extra inventory
in advance of holidays and sales events.
In addition to the benefits of inventory,
there are costs to holding inventory. These in-
clude the costs to acquire, hold, store, handle,
and finance inventory. Inventories are also
subject to obsolescence. For example, elec-
tronic consumer products, like those sold at
Best Buy, are subject to quick technical obso-
lescence. Thus, management must balance the
benefits of holding inventory against these
costs.
In this chapter, we will define inventory for
manufacturers and merchandisers, illustrate in-
ventory valuation approaches, and introduce
ratios used to analyze management’s effective
use of inventory.Best Buy
© KIICHIRO SATO/AP PHOTO