Inventory Basics
Inventory, most people think of inventory as stuff that stores buy, put on their shelves and then sell. Yeah, that's inventory but
there's so many other types of inventory too. Inventory that companies never really intend to sell. Banks, landscapers, cleaning companies,
hotels, schools, they all have inventory. Not quite sure what I'm talking about? Well, let's think of ourselves. Even you, those of
you that don't sell anything at all, at your house, you have inventory. What kind of inventory? Clothes, furniture, appliances, electronic
devices, cleaning supplies, food, that's your stuff. That's your inventory. Why do you have that stuff? Some of it because you need
it now, some of it because you'll need it soon, some of it you have just in case you need it. I mean, what happens if you need to staple
something? Good thing you had a stapler and staples. What happens if friends drop by and they're hungry or thirsty? Good thing you
had lemonade and snacks. What happens if your kid scrapes their knee? Not a problem because you have BAND-AIDs. Inventory protects
us against the unknown. Actually that's something companies worry about a lot. The unknown, risk. Inventory protects companies against
risk. What kind of risk? The risk that bad things might happen to your customers, to your company, to your suppliers. Inventory will
protect you against all those bad things. Think about it, if your supplier has a fire, no problem, we have extra raw materials inventory.
If the retail store sells all of their inventory, no problem, we have extra finished goods inventory ready to ship. Suppose your customer
buys a defective product, we can fix that with inventory. Here, return your broken item and we'll give you another one to replace it.
Inventory is insurance against almost any problem your operation might face but just like car insurance, it costs money and just like
a risky car driver pays more for insurance, a company with risky suppliers, a disorganized manufacturing facility, and unknown customer
demand needs more insurance which means they need more inventory. The thing is that while your inventory can protect you against all
sorts of risk, inventory carries its own risks and costs. When inventory sits around, there's a chance that it will be lost, broken
or stolen before it's ever used or sold. There's also a chance the inventory will spoil or go out of style before it's sold. Also,
inventory needs to be stored somewhere. You have to pay for storage, security and perhaps energy costs associated with climate control.
So, if inventory has so many negatives, why do companies have it? Sometimes companies buy lots of inventory to take advantage of quantity
discounts or perhaps they realize that manufacturing in large batches helps them achieve economies of scale. Why open the factory just
to make one car? Make a large batch instead. Also, some companies carry lots of inventory because that is their promise to their customers.
We'll have whatever you want whenever you want it. And then think about seasonal products like snow shovels. Snow shovel companies
very likely make snow shovels all year round. They build up big inventories over the summer in anticipation of big sales in the winter.
So, inventory can be very important. But it can also be very expensive. Look at your inventory of food. Look in the fridge, look in
the pantry. What do you have? What are you missing? Which inventory items have been sitting there for weeks or months? How many groceries
have you thrown out in the last month? Think about issues like space, the amount of money you have to buy groceries. Think about how
many times you've had to make an unscheduled trip to the grocery store to buy something you ran out of. Feeding yourself and your family
is part of your daily operations at home. Poor inventory management wastes money, food, time, gasoline and sometimes it forces you
to eat food you don't really like. Perhaps it's time to reconsider some of your personal inventory policies.
