Inventory serves several purposes including meeting demand, smoothing production requirements, and protecting against stockouts. There are three main types of inventory costs: holding costs, ordering costs, and shortage costs. Materials can be classified into three categories based on their value and volume contribution. Economic Order Quantity (EOQ) and Economic Production Quantity (EPQ) models can be used to determine the optimal order/production quantity that minimizes total inventory costs. EOQ assumes constant demand while EPQ assumes production and usage occur simultaneously at constant rates. Both aim to balance holding and ordering costs.