Define inventory and discuss why inventories are maintained. What are the four Inventory Models?
Inventory is defined as the goods within a business’s supply and control that are available for sale. Inventories are
maintained for several reasons. In order to sustain business operations efficiently, businesses should keep well-stocked
inventories. For example, it allows for businesses to meet demand by customers in the event customer demand
increases. It also allows companies to benefit with low costs when purchasing raw materials. Additionally, if there is any
malfunction in equipment or equipment is inoperable, businesses will not feel substantial affects in sales due to an
adequate inventory of goods that can still be sold while operations are temporarily interrupted. A stable inventory also
allows businesses to frequently distribute goods to merchants as needed vice shipping recurring orders based on single
orders or production cycle. Financial reasons also play a role in businesses maintaining inventory. For example, inventory
can be calculated into a company’s cost of goods which counts towards their total assets.
The four types of Inventory models are: The ABC inventory analysis model, Economic Order Quantity (EOQ) model,
Single Period inventory model, and Fixed-period system (FPS) model. The ABC inventory model is also sometimes
referred to as the ‘Selective Inventory Control’ and based on reasoning that in any substantial quantity, companies
usually have ‘significant few’ and ‘insignificant many.’ A business maintaining various types of inventories does not need
to practice a similar amount of control on all the goods. Businesses can utilize a selective approach to manage
investments of different inventory types hence this selective approach is known as ABC Analysis. High valued items are
classified as ‘A Items’ however, are a small percentage of the total items. Low valued items are classified as ‘B Items’ and
‘C Items’ the least or no value and require no close control and can be managed via automated computer systems.
Economic Order Quantity (EOQ) model is the order amount a company should buy to reduce inventory costs such as
holding costs, shortage costs, and order costs. The objective of EOQ is to pinpoint the ideal number of goods to order. If
accomplished, a company can minimize its costs for purchasing, distribution, and storage. The Single Period inventory
