1 .Importance

　　■If inventory is too high;

　　Inefficient → profit reduced

　　■If inventory is too low;

　　Insufficient to satisfy customers → profit reduced.

　　2. Reasons for Holding Inventory

　　■To meet demand by acting as a buffer in times of unusually

　　high consumption (i.e. to reduce the risk of "stock-outs").

　　■To ensure continuous production.

　　■To take advantage of quantity discounts.

　　■To buy in ahead of an expected shortage or ahead of an expected price rise.

　　■For technical reasons (e.g. maturing whiskey in casks or keeping oil in pipelines).

　　■To reduce ordering costs.

　　3 .Inventory Costs

　　■ Purchase price

　　■ Holding costs:

　　cost of capital tied up;

　　insurance;

　　deterioration, obsolescence and theft;

　　warehousing; and/or

　　stores administration.

　　■ Re-order costs:

　　transport costs;

　　clerical and administrative expenses; and/or

　　batch set-up costs for goods produced internally.

　　■Shortage costs:

　　production stoppages caused by lack of raw materials;

　　stock-out costs for finished goods—anything from a delayed

　　sale to a lost customer; and/or

　　emergency re-order costs.

　　■ Systems costs—people and computers.