One of the major functions of inventory is to decouple manufacturing processes within the organization. If you did not store inventory, there could be many delays and inefficiencies. For example, when one manufacturing activity has to be completed before a second activity can be started, it could stop the entire process. If, however, you have some stored inventory between processes, it could act as a buffer.

Agricultural and seafood products often have definite seasons over which they can be harvested or caught, but the demand for these products is somewhat constant during the year. In these and similar cases, inventory can be used to store these resources.

In a manufacturing process, raw materials can be stored by themselves, in work in process, or in the finished product. Thus, if your company makes lawn mowers, you might obtain lawn mower tires from another manufacturer. If you have 400 finished lawn mowers and 300 tires in inventory, you actually have 1,900 tires stored in inventory. Three hundred tires are stored by themselves, and 1,600 (1,600 = 4 tires per lawn mower × 400 lawn mowers) tires are stored in the finished lawn mowers. In the same sense, labor can be stored in inventory. If you have 500 subassemblies and it takes 50 hours of labor to produce each assembly, you actually have 25,000 labor hours stored in inventory in the subassemblies. In general, any resource, physical or otherwise, can be stored in inventory.

When the supply of or demand for an item is irregular, storing certain amounts in inventory can be important. If the greatest demand for Diet-Delight beverage is during the summer, you will have to make sure that there is enough supply to meet this irregular demand. This might require that you produce more of the soft drink in the winter than is actually needed to meet the winter demand. The inventory levels of Diet-Delight will gradually build up over the winter, but this inventory will be needed in the summer. The same is true for irregular supplies.

Another use of inventory is to take advantage of quantity discounts. Many suppliers offer discounts for large orders. For example, an electric jigsaw might normally cost $20 per unit. If you order 300 or more saws in one order, your supplier may lower the cost to $18.75. Purchasing in larger quantities can substantially reduce the cost of products. There are, however, some disadvantages of buying in larger quantities. You will have higher storage costs and higher costs due to spoilage, damaged stock, theft, insurance, and so on. Furthermore, by investing in more inventory, you will have less cash to invest elsewhere.

Another important function of inventory is to avoid shortages or stockouts. If you are repeatedly out of stock, customers are likely to go elsewhere to satisfy their needs. Lost goodwill can be an expensive price to pay for not having the right item at the right time.