5. What is Inventory?
Inventory is everything a business owns with the intent to sell, use, or transform into a finished product. It includes raw materials, components, work-in-progress (WIP), and finished goods that are ready to be shipped.
In simple terms:
Inventory is the “stuff” you hold today in order to make money tomorrow.
But managing inventory is not just about “how much stuff” you have. It’s about what you’re holding, where it is, how fast it moves, and how much it costs you to keep it.
Let’s explore what inventory really means in business — and why it’s one of the most powerful (and dangerous) forces on your balance sheet.
The 3 Main Types of Inventory
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Raw Materials
These are the basic inputs used to produce goods.
Example: Fabric, metal, plastic, sugar, etc.
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Work-In-Progress (WIP)
Partially completed products that are still being assembled or manufactured.
Example: Half-finished jewelry, dough rising in a bakery, a circuit board waiting to be installed in a phone.
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Finished Goods
Products that are complete and ready for sale.
Example: A packaged T-shirt, a boxed smartphone, or a ready-to-ship bracelet.
In retail and e-commerce, you typically only deal with finished goods — but if you manufacture, all three types are important.
Key Terms You Need to Know
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SKU (Stock Keeping Unit): A unique code that identifies each product variation in your inventory (e.g., color, size, version).
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Inventory Turnover: A ratio that tells you how often your inventory is sold and replaced in a time period.
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Safety Stock: Extra inventory kept on hand to prevent stockouts due to delays or sudden demand.
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Reorder Point: The inventory level at which a new order should be placed to avoid running out.
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Lead Time: The time it takes between ordering inventory and receiving it.
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Dead Stock: Inventory that hasn’t sold for a long time and likely won’t — a major cost and storage problem.
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Stockout: When you run out of a product and can’t fulfill an order — hurting revenue and reputation.
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Holding Costs (or Carrying Costs): All the costs of keeping unsold inventory (storage, insurance, shrinkage, opportunity cost).
Why Inventory Matters in Business
1. It Ties Up Cash
Inventory is not cash, but it costs cash.
If you buy too much, you risk running out of space, damaging goods, or not selling in time.
If you buy too little, you lose sales opportunities and damage customer trust.
2. It Affects Profit Margins
Every unit in your warehouse represents sunk costs: materials, labor, shipping, and storage. Efficient inventory management minimizes waste and maximizes profitability.
3. It Impacts Customer Satisfaction
Late delivery or out-of-stock items frustrate customers and hurt your brand. Accurate inventory ensures you can deliver what you promise.
4. It Determines Scalability
You can’t scale reliably if you don’t know what you have, what you need, and when you’ll run out. Inventory systems are the foundation of growth.
Inventory Management Methods
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Just-in-Time (JIT): Receive inventory only when needed. Low holding costs, high risk.
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Economic Order Quantity (EOQ): A formula to find the ideal order quantity that minimizes total costs.
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ABC Analysis: Categorize inventory into three tiers:
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A = high-value, low-quantity items (critical)
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B = moderate-value, moderate-quantity
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C = low-value, high-quantity (low risk, but bulky)
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FIFO vs LIFO (First In, First Out vs Last In, First Out): Methods for rotating stock to avoid expiration or loss.
Inventory Systems and Tools
Modern businesses often use a Warehouse Management System (WMS) or Inventory Management System (IMS) to track stock levels, manage locations, forecast demand, and automate reordering.
Key features include:
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Real-time stock visibility
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Barcode/RFID scanning
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Integration with sales channels (e.g., Shopify, Amazon, ERP systems)
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Analytics dashboards and forecasting tools
In Summary
Inventory is more than just product sitting on a shelf. It’s one of the most important levers of cash flow, operational efficiency, and customer satisfaction.
Too much inventory? You waste money and space.
Too little? You miss sales and lose trust.
Manage it well? You unlock a scalable, profitable business.
If you're building or running a product-based company, understanding your inventory — deeply — is non-negotiable. It’s where logistics, finance, and customer experience all meet.
