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What Is Average Inventory?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 March 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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An average inventory is a type of calculation that makes it possible to compare inventories from two different periods and determine the median or average between those two. The idea is to make use of this average to determine if an inventory is remaining fairly constant over time, or if some factors may be present that have caused an upward or downward shift in the inventory. Purchasing agents and supply clerks will often utilize this approach as a means of managing the supply chain within a company structure, preventing situations such as an unnecessarily high inventory or one that is likely to be so lean that it cannot support the operation properly.

The idea of an average inventory can be utilized in two different ways. One approach is to focus on the monetary value of the inventory itself. In this application, the total value of an inventory as of two specified dates is averaged to determine if that inventory is remaining within an acceptable range. For example, a business may note that the total worth of the inventory came to $1 million US dollars as of 31 December of the most recently completed year, while the inventory value for the previous year on the same date came to $1.2 million USD. This would leave an average between the two dates of $1.1 million USD, indicating that the overall chance between the two periods was within relatively close and likely within an acceptable range.

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A second approach to an average inventory focuses more on the actual units of an item than the monetary value. Here, the idea is usually to determine if something has changed in the usage that requires changing the way that item is ordered. For example, if an average between the number of units on hand for the same dates in two consecutive years indicates a large variance, this would trigger an investigation into why the change took place. In some cases, it may mean that the item is no longer needed as frequently and there is a need to revise any standing or recurring orders for the item in order to avoid increasing the inventory count.

As a tool to help manage inventories, the average inventory approach provides the benefits of either affirming that current ordering and supply management processes are meeting the needs of the business, or that there is a need to make changes before an inventory is overstocked and results in additional tax burdens for the company, or becomes understocked and threatens to delay production of goods and services. By making use of the average inventory calculation along with other supply management strategies, it is possible to keep inventories on track and make sure the company has what it needs when and as those items are required.

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