Inventory is not simply a “cost of doing business.” It directly affects a company’s profitability and the cost of goods sold. Business practices of lean manufacturing treat unsold inventory as a waste, to be eliminated where possible.
Inventory control is “the process of managing inventories in such a way as to minimize inventory costs, including both holding costs and potential out of stock costs,” write authors William M. Pride, Robert J. Hughes and Jack R, Kapoor in “Business.”
Manufacturers recognize three general types of inventory: raw materials, work-in-process (WIP) and finished goods. At a car maker, a tire is raw material, the chassis on the production line is WIP, and the finished automobile is finished goods. While each is under ownership of the company, it is inventory. Retailers have only finished goods--called "stock" or "merchandise."
Inventory costs a company in purchasing, storage and handling. Effective inventory control minimizes those costs, by determining the minimum of time required to receive materials from suppliers, and to produce goods to order; and the minimum amount of raw materials required to begin an order.
An inventory control system is a methodology, or technology, of inventory control. It may be as simple as a handwritten manifest, as complex as a material requirements planning (MRP) system. Enterprise software providers, including SAP and Oracle, offer dedicated inventory control software systems.
Cost of Goods Sold
An effective inventory system minimizes the cost of inventory, including storage costs; handling; and loss through pilfering and obsolescence.