According to ManagementStudyGuide.com, an educational portal, inventory is needed to keep a company independent of outside changes in supply and demand. Maintaining inventory also allows a company to take advantage of outside pricing opportunities.
ManagementStudyGuide.com states that there are multiple ways to use inventory to profit a company. Inventory can prevent shortages that lead to volatile pricing. Inventory also helps the company weather changes in vendor product pricing that would otherwise cause a rise in the cost of doing business. Inventory even plays a part in strategic planning, as a company can choose to enlarge its inventory in anticipation of rising vendor prices. This allows the company to continue selling its product at the same price as it waits for vendor prices to fall or seeks out alternative suppliers.
There are costs associated with holding inventory, notes ManagementStudyGuide.com. There is the initial cost of ordering the inventory. This cost can include transit costs for the inventory to the company's warehouse and the cost of the product itself. Once the product is purchased, there is a carrying cost. This cost includes storage costs for the product and the cost of maintaining the inventory and managing it. Shortages can also incur an inventory cost, as the company must make additional purchases to cover demand. Spoilage and obsolescence also cost companies money as inventory ages beyond its usefulness due to carrying more inventory than needed to meet demand.