Imagine, for a moment, that you’ve just come upon a bread factory for the first time. At first it just looks like a jumble of incomprehensible machinery with a few people buzzing around. As your eyes adjust, you start to see little piles of things that you do understand. Buckets of sesame seeds. Big vats of dough. Little balls of dough. Baked loaves of bread.
Those things are inventory. Inventory tends to pile up between machines. Next to the machine where sesame seeds are applied to hamburger buns, there’s a big vat of... sesame seeds. At the very end of the assembly line, there are boxes and boxes of bread, waiting for trucks to drive them off to customers.
Keeping inventory costs money. Suppose your bakery has six 50-ton silos to store flour. Whenever they empty out, you fill them up. That means on the average day you have 150 metric tons of wheat flour in stock. At today’s prices, you’ve tied up $73,000. Forever.
Inventory may have other costs too, like spoilage. Flour lasts for months, but the minute bread comes out of the oven it starts dropping in value; after 24 hours it’s nearly worthless.
Why keep inventory at all? Because there are costs associated with running out of things, too. If sesame seeds take two days to order, and you run out of sesame seeds, you are out of the hamburger bun business for two days. Inventory provides a buffer that prevents any part of the process from stalling. There are modern algorithms to optimize how ...