10 Inventory

Inventory is physical goods that a company intends to sell. Business model and inventory are interrelated. Here are some business models and their approach to inventory:

Manufacturer: a company makes inventory and sells it. For example, Yamaha Corporation manufactures musical instruments and audio equipment.Manufacturing companies have three types of inventory: raw materials, work in process, and finished goods. For Yamaha, raw materials may include wood, metal, wiring, etc. Work in process includes any materials, labour, and other inputs used to construct unfinished inventory. Finished goods is the pianos, violins, speakers, amplifiers, and other goods that are finished and waiting to be sold.

Wholesaler: a company that sells inventory to a retailer. The role of a wholesaler is as a distribution center for products.

Retailer: a company that sells inventory to the final customer. A retailer will often sell a variety of products and brands. For example, St. John’s Music is a retailer of Yamaha products, but they also sell Fender and Roland brand equipment. Other examples of retailers include your local grocery store, Canadian Tire, or Aritzia.

We will focus on wholesale and retail companies. These companies create value by reselling finished goods. For a very obvious reason, we won’t talk about service companies. What is this reason? Service companies do not sell inventory!

This chapter discusses inventory systems and inventory costing. These concepts answer the following questions:

• Inventory systems: how does a company record changes to inventory and how often does the company adjust its books?
• Inventory costing: how does a company determine the cost of each inventory unit?

Let’s get going!