Inventories

Inventories are goods and materials that a business holds for sale in the ordinary course of business, for use in production, or for maintenance and repairs. They typically include raw materials, work-in-progress, finished goods, and maintenance, repair, and operations supplies (MRO).

Inventory serves to support production and customer service, achieve economies of scale, and hedge against variability in demand and supply. Firms must balance the cost of holding stock—warehousing, insurance, obsolescence—against the risk of stockouts and lost sales.

Inventory is managed using perpetual or periodic systems. Perpetual systems track inventory continuously and are often integrated with procurement and sales software. Periodic systems update records at intervals. Methods for valuing inventory include FIFO, LIFO, and weighted average; some standards restrict LIFO. In accounting, inventories are generally treated as current assets and valued at cost or net realizable value.

Common techniques to optimize inventory include ABC analysis (prioritizing items by value or volume), economic order quantity, just-in-time production, Kanban, and vendor-managed inventory. Key decisions include safety stock levels, reorder points, and lead time management.

Measurement focuses on turnover, days of inventory on hand, and carrying costs, with attention to risks such as obsolescence, spoilage, damage, and theft. Inventory accuracy is critical for financial reporting and operations planning, and is supported by barcodes or RFID, audits, and internal controls.