The Main Function of Inventory

by Ann Johnson, Demand Media

Inventory is not just about the items a retailer sells. Inventory management involves taking stock of a business' assets, such as labor, cash and material items used or sold. In essence, inventory control enables the business to have what it needs, when it needs it in order to do business.

Inventory Control

The goal for a business is to invest the least amount in inventory while maintaining specific operating requirements. Ideally, the inventory control in place allows the business to supply needs in regards to production or to the customer at the precise moment needed, at the minimal price. Successful inventory control keeps waste and surplus at a minimum and efficiently handles storage, production and distribution of inventory.

Primary Function

The primary function of inventory is to use marketing and production to increase profitability, to get the maximum amount for the business' investment. There are other functions of inventory, such as balancing supply and demand, improving efficiency, establishing a safety stock and geographical specialization. All of those help to increase a business' profitability.

Balancing Supply and Demand

Balancing supply and demand involves replacing consumed items, and liquidating seasonal items. For example, when the supermarket stocks up Halloween items for the October holiday, it ideally wants to liquidate those items by November. Successfully handling inventory involves supplying demand at the precise time, for the least amount of money, without a surplus.

Safety Stock

When controlling inventory, one function is maintaining safety stock. This involves having a buffer stock in case of an unexpected delay in replenishing inventory or excess sales. For example, if a breakfast restaurant only orders enough eggs to get it through an average weekend, yet experiences an unexpected spike in business, it risks losing sales, angering customers and damaging its reputation by being unable to serve enough eggs.

Geographical Specialization

Geographical specialization in regards to inventory involves maximizing the assets of each of the business' locations. Factors to consider include energy costs, location, labor and transportation. For example, a manufacturing company will want to locate in an area where it can distribute its product for the least amount of money. If it uses the railroad, distribution of the inventory near a railroad is wiser than a remote distribution center 100 miles away.

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