Think of inventory as the pantry of a business. Just as a chef needs ingredients on hand to cook meals, a company needs raw materials, work‑in‑progress (WIP) and finished goods ready to meet demand. Without enough inventory, sales can drop; with too much, costs rise.
| Category | Example | Purpose |
|---|---|---|
| Raw Materials | Steel, plastic, fabric | Starting point for production |
| Work‑in‑Progress (WIP) | Half‑finished cars, partially assembled phones | Products that need further processing |
| Finished Goods | Completed smartphones, ready‑to‑ship cars | Ready for sale or distribution |
Imagine a busy restaurant: raw materials are the fresh produce and meats; WIP are dishes in the oven or on the grill; finished goods are the plated meals ready to serve. If the kitchen runs out of ingredients, diners wait. If too many dishes sit on the grill, the kitchen over‑cooks and wastes food. Balancing the pantry is key to a smooth operation.
\$\displaystyle \text{Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\$
\$\displaystyle \text{DSI} = \frac{365}{\text{Turnover}}\$
When answering questions about inventory, always:
Remember: “Inventory is the lifeblood of production.” 📦
Apple keeps a tight grip on its inventory. Raw materials (silicon, aluminum) are sourced globally. WIP includes assembled iPhones in factories. Finished goods are stored in distribution centers. Apple’s high turnover ratio (≈10× per year) shows efficient inventory management, reducing holding costs while meeting global demand.