The document defines inventory as materials, parts, and finished goods that are stocked to meet future demand or distribution. Inventory is categorized as production inventory (raw materials), MRO inventory (maintenance supplies), work in progress, and finished goods. The objectives of inventory are to facilitate operations and transportation, isolate different parts of the supply chain, reduce handling costs, and allow for customer service and quantity discounts. The types of inventory costs include ordering costs, carrying costs, out-of-stock costs, and capacity costs.

2. Meaning and Definition
 The term inventory originates from the french
word ‘Inventaire’ and Latin word ‘Inventariom’
which implies a list of things found.
 The term inventory includes materials- raw, in
process, finished packaging, spares and others
stocked in order to meet an unexpected demand
or distribution in the future.

3. Inventory includes the following
categories
 Production inventories- Raw materials, parts and
components which enter the firm’s product in the
production process.
 MRO Inventories – Maintenance, repair, and
operating supplies which are consumed in the
production process but which do not become part of
the product.
 In process inventories- Semi finished products
found at various stages in the production operation.
 Finished goods inventories- Completed products
ready for shipment.

4. Objectives
 Supplies inventories do not directly go into the
product. But they exist to facilitate smooth
operation of the manufacturing process.
 Inventories facilitate transit and handling.
Materials may be transported thousands of
kilometers before they are incorporated into an
end product.
 Inventories serve to isolate the supplier, the
producer and the consumer.

5. Objectives
 Raw material inventories isolate the supplier of
raw materials from the user of these raw
materials.
 Finished goods inventories isolate the user from
the producer of the goods. And in process the
inventories isolate the departments within the
plant.
 Inventories reduces material handling costs.
 Inventories are held to facilitate product display
and service to the customers.

6. Functions of Inventory
 To meet anticipated customer demand
 To smooth production requirements
 To decouple operations
 To protect against stock outs
 To take advantage of order cycles
 To hedge against price increases
 To permit operations
 To take advantage of quantity discounts

7. Types Of Inventory Costs
 Ordering Costs
 Carrying Cost
 Out-of-stock / Shortage Cost
 Capacity Cost

8. Ordering Costs
1) Cost of placing an order with a vendor of
materials
 Preparing a purchase order
 Processing payments
 Receiving and inspecting the material
2) Ordering from the plant
 Machine set-up
 Start-up scrap generated from getting a production
run started

9. Carrying Costs
1) Costs connected directly with materials
 Obsolescence
 Deterioration
 Pilferage
2) Financial Costs
 Taxes
 Insurance
 Storage
 Interest

10. Out-of-stock Costs
1. Back Ordering
2. Lost Sales

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