Glossary

Inventory is the aggregate of all the goods and materials used and held by a company to make, or incorporate into, its products. The main types of inventory are raw-materials inventory, work-in-process inventory, and finished-goods inventory.

Inventory carrying cost is the cost of owning inventory and having it available. Costs depend on the inventory’s value, and also on storage space, obsolescence, spoilage, taxes and insurance.

Higher inventory levels drive higher inventory carrying costs, but can also improve customer service (product available to ship today) and reduce risk of disruption due to events such as supplier delays or the breakdown of critical machine.

Inventory days of supply measures the average amount of inventory on hand, expressed as how long it would take to use it all. The assumption is no more inventory comes in, and production usage will be average.

The volatility of supply and demand determine what is required. Companies with stable demand and reliable suppliers can operate with very low inventory days of supply.

The business metric of inventory turns measures how quickly a business sells through its inventory. It is calculated by dividing the Cost of Goods Sold by the average inventory level for a chosen time period. A high number usually implies sales are strong and the business is not holding excessive inventory. (see Cost of Goods Sold)