Inventory consists of a list of goods and materials held available in stock. Inventories are essential for merchandising and manufacturing businesses. Inventories are necessary in order to generate sales, and sales are necessary in order to generate profits.

The primary benefit of carrying inventory is that it provides protection against unexpected events and disruptions in business operations. For example, an unexpected strike by a supplier`s employees can halt production for a manufacturer or cause lost sales for a merchandiser. Businesses that rely upon foreign suppliers are particularly affected by disruptions caused by international crises and events.

Carrying inventory also allows a business to meet unexpected increases in the demand for its products. Thus, you can think of inventories as a buffer or cushion against the unexpected.

Inventory is not free. The costs of carrying inventory are classified as:

• Holding costs
• Ordering costs
• Stock out costs

Holding costs include...