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Why do companies hold inventory?
What are the reason for companies to hold inventory? The revenue is tied to the inventory hold cost in this case right?
Holding of the inventory is because there is always an imbalance in terms of supply and demand. Whenever the demand increases, there will be a lag time before the inventory can arrive in time. To prevent stock out from happening, the companies will hold the stock in the warehouse, so as to meet the demand whenever the needs arise.
Even though the inventory holding cost is incurred, it is less expensive than stock out incidents.
The primary reason for holding stock is to generate revenue through the sale of goods and services.
What happen if the forecast is not accurate and the stocks are not selling?
Then you will have goods basically sitting in the warehouse. Not an ideal situation for the company.