Inventory refers to all the products that a business keeps but has not currently sold. Inventory is an important concept for many product-oriented businesses. Manufacturers often try to have as little inventory on hand as possible to increase efficiency. Distributors need to have a certain amount of inventory on their shelves, but still attempt to control how much inventory they have in storage. Having too many spare products on hand can be a disadvantage to any company.
If a company has excess inventory (for distributors, excess beyond what they can store on their shelves), they must keep it somewhere. This is usually rented or owned warehouse space and this costs companies money they would not need to spend if they did not have the extra inventory. Storage space is a continuous extra cost that businesses attempt to reduce by limiting how much inventory they have on hand at any given time.
Excess inventory must also be shipped to and from storage. While transportation costs may not seem like a large item at first, businesses that keep excess inventory must pay these costs every time they want to replenish or switch out their inventory. Freight for large or heavy products can also be considerable, adding even more to the cost of holding onto excess items.
A business with excess inventory naturally expects to sell it in the future. But in buying or creating this inventory, the business is betting customers will want it at all in the coming months, a bet they may lose. If the market suddenly shifts in favor of a new product or alternative item, the business will be stuck will suddenly less valuable products in which it has already invested.
Quality control is the process of ensuring that products are created without flaws and according to customer standards. Manufacturers have firm control over quality when they are producing products on demand. But when manufactures create an excess of products, they may find a flaw too late and have a number of wasted products, capital costs that they cannot reclaim.